You might not be able to take advantage of all of the tax deductions you have available to you if you don’t keep proper records. Even if you can document certain expenses, if you don’t document them properly, you won’t be able to write those expenses off. Keeping bills and receipts correctly will help you earn all of the tax deductions you deserve each year.
If you are a business owner, you can deduct a variety of travel, entertainment, operating and home office deductions. The IRS specifies which deductions you can take at its website, including amounts. A home office must be used exclusively for conducting business and be your primary place of work. Gifts are limited to a $25 deduction.
If you do not own a business, you may still qualify for some tax deductions, such as child tax credits, student loans, home energy upgrades and mortgage interest. Keep personal expense receipts and statements separate from your business receipts. Keep receipts for childcare expenses and annual statements for mortgage payments. Keep the year-end summary you receive for your mortgage, which breaks down how much of your payments went to principal, interest and taxes. A bank statement, showing checks written to a particular payee, may not be enough to pass an audit.
If you use your car for business, you may deduct the expense using mileage numbers. The 2012 deduction for auto use is 55.5 per mile driven for business, 23 cents per mile for medical or moving purposes, and 14 cents per mile if you are doing work for a charity. This figure covers your gas, oil, wear and tear and repairs, and you may not deduct those expenses. Keep records of your mileage by trip, rather than estimating your monthly or annual mileage. If you are audited, the IRS will ask you for your mileage records, and the auditor might want records that show each trip’s purpose, the date and the mileage.
If your home office qualifies for a deduction, you will need a document that shows the square footage of your house, as well as your utility bills and property tax bill. Your home office deduction is based on the square footage of your office. If your office is 10 percent of your home, you will calculate your deductions based on 10 percent of your rent or mortgage, utilities, taxes and insurance. If you purchase equipment or have repairs made, save your invoices and cancelled checks if you pay by check and don’t receive a receipt.
Meals and Entertainment
Don’t rely on credit card statements for your meals and entertainment deductions. You will need receipts from each meal purchased, as well as from gift or entertainment purchases. A credit card statement may show a $100 payment at a restaurant, while a receipt for that bill might show the number people who attended the meal.
As with meals and entertainment expenses, you’ll want to save your receipts for travel-related expenses, rather than relying on credit card statements. A credit card statement will show a total amount of your hotel bill, but your room receipt will let the IRS see meals charged to your room, incidentals, tennis, golf or spa fees and other non-lodging purchases.
Keep your investment records separate from personal and business records. This will help you keep track of your profits and losses from the sales and purchases of securities, reinvested dividends, broker fees and withdrawals from financial instruments. Ask your stockbroker or financial advisor how to keep the proper records to avoid unnecessary taxes on your investments.
Ask for a receipt when you donate goods or money to charities. Not all nonprofits are charities — make sure you are donating to a charitable organization that lets you write off the donation if you are interested in that deduction.
There are many personal and business tax-deductions available to Americans. The more specific you can get with your record-keeping, the better. As a guiding principle, keep receipts and invoices for each individual expense, rather than relying on credit card, bank or other statements.
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