An important part of tax planning is keeping good records. Having an organized recordkeeping system makes it easier to file a tax return or understand a letter from the IRS. Here are some tips:
Good recordkeeping helps taxpayers is a number of ways including:
- Identifying sources of income. Taxpayers may receive money or property from a variety of sources. The records can identify the sources of income and help separate business from nonbusiness income and taxable from nontaxable income.
- Keeping track of expenses. Taxpayers can use records to identify expenses for which they can claim a deduction. Tax records help determine whether to itemize deductions at filing. It may also help them discover potentially overlooked deductions or credits.
- Preparing tax returns. Good records help taxpayers file their tax returns quickly and accurately. They should add tax records to their files throughout the year as they receive them to make preparing a tax return easier.
- Supporting items reported on tax returns. If the IRS selects the return for examination or if the taxpayer receives an IRS notice, well-organized records make it easier to provide answers .
In general, taxpayers should keep records for three years from the date they filed the tax return. It is important to develop a system that keeps all their important information together – whether it is a software program for electronic recordkeeping or labeled folders to store paper documents.
What Records to Keep:
1. Tax-related records. This includes wage and earning statements from all employers or payers, interest and dividend statements from banks, certain government payments like unemployment compensation, other income documents, and records of virtual currency transactions. Taxpayers should also keep receipts, canceled checks, and other documents – electronic or paper – that support income, a deduction, or a credit reported on their tax return.
2. IRS letters, notices, and prior-year tax returns. Taxpayers should keep copies of prior year tax returns and notices or letters they receive from the IRS. These include adjustment notices (where an action is taken on the taxpayer’s account), Economic Impact Payment notices, and letters about advance payments of the 2021 child tax credit. Taxpayers who receive 2021 advance child tax credit payments will receive a letter early next year that provides any payments they received in 2021. Taxpayers should refer to this letter when filing their 2021 tax returns in 2022.
3. Property records. Taxpayers should also keep records relating to property they dispose of or sell. They must keep these records to figure their basis for computing gain or loss.
4. Business income and expenses. For business taxpayers, there’s no particular method of bookkeeping they must use. However, taxpayers should find a method that clearly and accurately reflects their gross income and expenses. Taxpayers who have employees must keep all employment tax records for at least four years after the tax is due or paid, whichever is later.
5. Health insurance. Taxpayers should keep records of their own and their family members’ health care insurance coverage. If they’re claiming the premium tax credit, they’ll need information about any advance credit payments received through the Health Insurance Marketplace and the premiums they paid.
Need help setting up a recordkeeping system that works for you? Don’t hesitate to call.