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Take extra step to keep good records

April 01, 2012

Did you throw money away in 2011?

You did if you were unable to claim legitimate deductions on your tax return because you didn't have records or forgot about expenses. Life gets so busy and things like record keeping slip through the cracks, but if you set up a system now that's easy to follow, next year's tax time should be easier, and maybe more profitable.

Tracking expenses in budgeting software like Quicken takes time up front but the ability to run reports by category, or search your register for specific payees saves time in the long run. Even if you only use it to track tax items and call everything else "miscellaneous," you're ahead of the game (for your tax preparation anyway). Whether you use Quicken or not, you'll need a central place to gather your receipts and documentation.

Depending on the volume of records you have and if you want to sort now or sort later, you can use anything from the tried and true shoebox, to an expanding file pocket, to a file box divided by categories. The important thing is to use something you will use. Keep a master list of the types of items you will be saving, and leave some space for notes. So what goes into that shoebox or into Quicken? Let's start at the top — of the tax return.

Please note this is intended to be general in nature and not all-inclusive of tax regulation.

Income items
Save your paystubs throughout the year, and reconcile with your W2 at year end. Note in your check register, in Quicken, or on your bank statements sources of additional (especially large) income such as gifts or reimbursements. Should you be audited, you may be asked where the money came from, in an IRS effort to uncover unclaimed income.

If you have investments in non-retirement accounts, keep all of your statements pertaining to each investment from the time of purchase. When you sell a mutual fund that has been reinvesting dividends, for example, you will need those statements to show the cost of the additional dividends purchased and when. This will help to reduce your gain (or increase your loss).

When selling a stock you have had for many years, finding the documentation and tracking splits can be a challenge. Take the time to dig up that information when you sell, not during the pressure cooker of tax season. This sort of documentation can grow rather large and may span more than one year, so it's best to keep those statements in their own file.

Adjustment Items
Are you paying on a student loan? Don't forget about the interest at year end. Make a note for yourself in your file to check online for your statements that may not be mailed.

Keep statements and cancelled checks showing any IRA contributions and the year to which they were applied.

If you move during the year for a new job that is at least 50 miles further from your previous residence than your last job was, you may be able to deduct moving expenses. You must also meet the time test, meaning you must start your new job within one year of moving, and you must work full time at a new job for at least 39 weeks during the first year. Keep receipts for your movers, storage, truck rental, miles to your new home, and lodging (but not meals).

Deduction Items (for those that itemize)
If medical expenses for you and your dependents will exceed 7.5 percent of your adjusted gross income, they will help you on your federal return if you otherwise itemize. Save receipts for unreimbursed payments to doctors, labs, hospitals, and for prescriptions. You can also deduct miles driven for medical transportation, tolls, and parking. If you live in a state like New Jersey (but not Pennsylvania) that has a lower threshold for the deduction, it pays to keep receipts just in case.

When you pay a balance due for income taxes or estimated payments, keep records of those payments and copies of the checks. Same goes for property taxes, and always request a receipt from the tax collector.

Keep your settlement sheet from home sales or purchases.
For contributions to qualified charities, unless you have a spiritual or other reason for not wanting to take a tax deduction for donating, don't give cash. The IRS will not accept your word that you gave $20 a week in the offering plate. You can use a cancelled check for proof if the monetary donation is less than $250, but for larger gifts, you must get acknowledgement from the organization. Many banks no longer include check images in their standard banking packages, so remember to either go online and print a copy of your checks while they are still available for viewing (front and back), or pay extra for the check imaging service if you are likely to forget to print them. A line in your check register will not fly if the IRS comes looking. If you donate new items to an organization, keep your purchase receipts, and if you give used items, keep a list of what is in that bag of clothes or other items, and make sure the organization signs your list. You will need to provide an estimate of the current value of the goods donated. A good source is Keep track of the miles you drive for charitable purposes, and out of pocket expenses in service to a qualified charitable organization.

Two myths about deducting charitable contributions: There is no standard amount of charity you can deduct (it's whatever you actually gave), and you cannot deduct the value of your donated time.

Moving on down the Schedule A to Miscellaneous Itemized Deductions
This is another case of needing to exceed a floor (2 percent of adjusted gross income) with your expenses before you can deduct them for the federal, and many people don't quite make it. These deductions include things like safety deposit box rental fees, tax preparation fees, job search costs, and unreimbursed employee expenses. The good news for Pennsylvania residents is that unreimbursed employee expenses are deductible from dollar one on the state return. Keep receipts for unreimbursed expenses like tools, supplies, uniforms, license fees, malpractice insurance, and employment related education. You will need the actual receipts, not just a line on your credit card statement showing a purchase at Sears. The deductibility rules vary slightly between federal and Pennsylvania, so consult your tax professional. You can also deduct miles driven and not reimbursed (but not commuting miles). The rules for car expenses and home office deductions are extensive, so we will tackle them in Part 2.

Erin Baehr is a certified financial planner and owner of Baehr Family Financial, a fee-only financial planning firm in Stroudsburg (

Erin Baehr

Pocono Record

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