There are a good number of reasons to maintain accurate tax records. They can help identify the exact source of all income, they can help taxpayers track their deductible expenses, and they can aid in the process of preparing a tax return. This information is also invaluable when faced with an audit of a return.
The basic kinds of records to maintain include:
▪️Proof of Income: including bank and brokerage statements, Form W-2, Form 1099, and Form K-1 for individuals involved with a partnership and / or a Subchapter S corporation.
▪️Investment Gains and Losses: statements received from mutual funds and brokerage houses, Form 1099, and Form 2439 (Notice to Shareholder of Undistributed Long-Term Capital Gains).
▪️Deductible Expenses: all written documentation received from charities, in addition to canceled checks, receipts / sales slips, and invoices.
▪️Home / Housing Costs: receipts that can be used to document major improvements made to a home, closing statements, and insurance records. This information can be used to adjust the cost basis of a home when it's sold.
When it comes to providing proof of payments, it's important to maintain for each type of payment:
▪️Cash, Credit, or Debit Cards: amounts paid, name of the payee, as well as the dates of all payments.
▪️Checks / Electronic Funds: in addition to the above-mentioned information for cash, taxpayers need to record the check / reference numbers and the dates these transactions were posted to bank accounts.
Taxpayers should also keep records associated with: alimony paid, casualty and theft losses, child care expenses, charitable contributions, education expenses, un-reimbursed business expenses, gambling winnings or losses, retirement account contributions, mortgage interest paid, moving expenses, pensions / annuity payments, taxes paid, and tips received.