Record Keeping

From the Desk of Michael T. McCormick

Record Keeping

I am often asked by clients, “What records must I keep to take a deduction?” The answer to that can be difficult as I never want to walk away from a legitimate deduction; however, good record keeping can be the difference between a deduction sticking under audit or a deduction getting disallowed. Despite a popular misconception that the IRS Reform Act of 1998 shifted “the burden of proof” on audits to the IRS, the law does not relieve any taxpayer of the obligation to keep proper records to substantiate deductions and tax basis. Here, we focus on common records that are needed in connection with taxes on your personal income.

You should keep records of expenses that can be claimed as itemized deductions. Thus, you should keep records of unreimbursed medical and dental expenses, including receipts showing the dates you paid them and receipts for transportation: primarily for, and essential to, medical care; payments of state income tax including any Forms W-2 from employment; any canceled checks of payments of state estimated tax; any additional state tax paid with your return (which also should be retained); records and canceled checks showing interest payments on your home mortgage; and payments of real estate and personal property taxes.

You also need records of charitable contributions. For cash contributions of any amount, keep a canceled check or a receipt from the charity showing the amount and date of the contribution. For a contribution of $250 or more, you need a written acknowledgment from the charity containing very specific information and you generally must get this before you file. Additional records are needed for contributions of property other than cash. If you perform services for a charity, keep records showing your out-of-pocket expenses. If you give clothing or household goods, you need proof that they are of “good or better” condition or they are not deductible at all.

You must keep records of stocks, mutual funds, bonds and other similar investment property. Retain information on how and when any such assets were acquired, including additional shares purchased by reinvesting dividends. For these items and other types of assets, you must keep track of your basis, which is used to measure your tax gain or loss when you sell an item. Basis is ordinarily your cost but this is different for property acquired by gift or inheritance or in a divorce. It is especially important to keep records of the basis in your home, which you may not sell for several years. Records of sales also need to be kept, along with commissions and other selling charges.

If you have a given deduction that you are uncertain about, always call me to discuss as there may be other ways to support a write-off. However, best practice is always keep receipts and contemporaneous notes.

For the next few weeks, I am going to delve into specific deductions that you may not have realized are deductible. This is the fun part of tax law and will hopefully give you some ideas as you start to compile your tax documentation.