If you want to give your tax record keeping skills a performance boost, do what accounting professionals do.
1. Maintain a separate bank account for all self-employed business activity. This will greatly minimize confusion come tax time by giving you just one place to look for business transactions. The same is true for credit cards; have a card used solely for business and another for personal purchases.
2. Reconcile your bank statements. Though tedious, it is the only way to know for sure if you’ve included everything in your records.
3. Take advantage of technology. There are many software applications available for organizing tax records, and digitizing your records can also save office filing space.
4. Track your finances by important tax categories. Knowing how to classify your expenses and income is half the battle. Look at your last tax return or accountant’s tax organizer for clues. Individuals should focus on itemized deductions and tax credit categories; business owners should look at Schedule C line items.
5. Be diligent and consistent. Make record keeping a year-round task, not a year-end burden. For instance, update business mileage records daily. File away receipts before they are lost. Record tax transactions as they occur throughout the year.
6. Watch for important receipts. You probably already know you should collect the standard items: W-2s, 1099s, and annual mortgage statements. But did you know that charitable donations of $250 or more must be substantiated by a receipt from the charity to be deductible? Also, keep all pay stubs and brokerage statements. They might contain hidden deductions.
7. Hold on to prior-year tax records. Because an IRS audit is always a possibility, keep copies of tax returns and supporting records for seven years.
8. Be aware of special tax breaks. Some records become important as tax rules change. For instance, business owners should be careful to maintain records on major equipment purchases to qualify for enhanced expensing perks. Homeowners need to keep supporting documents for energy-efficient purchases.
9. Keep your tax advisor abreast of major life changes. New happenings in your life, like a job change, new child, or change in marital status might affect how you track your income and expenses. A quick call to your tax pro will help you stay on top of things.