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How should I maintain my tax records?

WCG

By Jason Watson ()

There are several acceptable IRS techniques for maintaining your records. Each has its advantages, and you might find success in using a mixture depending on your needs and your attention to detail.

Separate Credit Card: If you use a separate credit card for your tax related purchases such as business expenses, rental property repairs and unreimbursed employee business expenses (job-related) then you can simply jot down on the credit card statement the nature of the expense. In most cases such as OfficeMax you can toss the receipt away since the merchant and the business nature is fairly obvious. However, and this is a big however, if you went to WalMart you might still want to keep the receipt- WalMart sells office supplies but they also sell diapers, which unfortunately is not a tax deduction.

Financial Software: Quicken and Money do a great job of tracking your expenses, but it is a garbage in garbage out system. A bit of patience is required to ensure that your software is giving you the information you need. Keep in mind that only tracking of your expenditures will not be enough. This would only be the ‘record’ part of the two-part requirement (see Do I need receipts for my expenses?). For example, if you spent $150 on office supplies, you can keep an electronic record of the purchase in Quicken but you will also need to keep a receipt, credit card statement, etc.

Envelopes: This is old fashioned, but still works well. Many taxpayers will label a handful of envelopes and toss receipts in each envelope depending on the purchase. For example, you could have goodwill, church, office supplies, meals, etc. as your labels. Shoeboxes work too, but they are really old fashioned- then again, they might give you a good excuse to buy some more shoes.

All kidding aside, as you stuff your envelopes you should jot down the business purpose. This is especially true for meals and entertainment where the substantiation (business purpose) requirements from the IRS demand the person’s name, what was discussed and if any portion was personal or pleasure.

Scanner: This is the best invention ever. Well, not really, but who wants paper or envelopes or shoe boxes? A receipt or invoice is still the best way of proving your tax deduction, by far. In reading several Tax Court opinions and summaries, it is amazing how a receipt can say a thousand words. So, each time you make a purchase, a contribution or receive a medical bill, jot down the business connection if necessary, and then scan it, and then forget it.

As a side note, many receipt printers in department stores such as Home Depot, WalMart, etc. use heat to print the receipt. Unless you put your receipts in the freezer the characters will fade over time. Ever leave your receipt on the seat of your car during the summer?

PDF Printer: This allows you to print anything to a PDF file. For example, if you wanted to save an electronic copy of a web page that is dynamic (such as your banking dashboard or home page) you cannot just save the web page contents to your computer. But if you print the web page and choose your PDF printer, the information on your computer screen will now be saved as a PDF. Most operating systems already have a PDF printer installed, but if not you can download one from www.cutepdf.com.

Backups: If you end up using an electronic archive you absolutely need to invest into Google docs, Carbonite or similar online backup service. It doesn’t do you any good if your computer crashes and all your tax information is gone. Scan your information to a folder, and have that folder selected as continuously backed-up. Whatever you use make sure it is a secure server, and that the provider performs their own backups.

Discipline: So much of your recordkeeping success will depend on your discipline. It is hard to be vigilant all the time, every day, but using the envelopes method with a monthly scan-fest over a cup of coffee is our strong suggestion.

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