tax tips — January 25, 2018

How to Back Up Tax Deductions

by Susannah McQuitty

A woman filing her taxes with her deductions in mind

Keeping careful records to back up your tax deductions is important for both business and personal expenses. There’s no gatekeeper section in the filing process where you have to present evidence, but the IRS has the right to see your proof on request if they are unsure of your qualification.

So what sort of paperwork can you use to back up your personal or business deductions?

A to-do list with taxes as top priority

Personal deductions

Paper records

Might as well start with the basics, right? While many of your records can be found behind a login these days, some taxing authorities still insist on sending your information in the mail.

You will likely receive tax due notices for real estate taxes, vehicle taxes and other property taxes. Be sure to keep these notices in your personal files if you plan to claim any property tax deductions.

Organizational records

Donations to qualified 501(c)(3) charitable organizations are tax deductible, and usually you’ll receive a receipt when you donate and an end-of-year giving statement if you gave over a certain amount.

When you add up your donations, make sure that you have documentation for each one. If you don’t, the organization should have records of your contributions. Just contact the charity and request a copy of your donation amount.

Bank and credit card statements

Sometimes you won’t receive the documentation you need, and sometimes you may lose track of important statements. Not to worry – if you paid with a check or credit card, you can find records of those transactions on your statements from the year. And if you’re lucky, the financial institution will produce a year-end summary and automatically categorize your expenses, so it’s easier to find what you need.

Soda bottles lined up a small business

Business deductions

Digital records

Online transactions are usually pretty easy to follow. Payment, hiring and service platforms like PayPal, Fiverr and Uber do a good job of keeping records of your transactions on their sites and sending tax documents like a 1099-K when the time comes to file your return.

If you’re claiming business-related expenses, it should be a breeze to prove those amounts with online records. Still, it’s your responsibility to have proof for your deductions readily available, so be sure to have all the necessary records to back up a business deduction before claiming it on your tax return.

Business-specific accounts

Speaking of bank accounts, one of the best ways to prove that an expense was business-related rather than personal is to keep separate checking accounts. For example, if you take a client out for lunch to discuss business, you can deduct the expense of that meal on your tax return. But how does the IRS know that your afternoon trip to the steakhouse was truly business-related? Well, if you paid the bill with your business checking account, your intentions are much clearer.

Did we miss anything?

What tax deductions are you having trouble backing up with income and expense records?

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