Money Mondays: What You Need To Know About The 2016 Tax Season - Page 2

 

Tom:  Good morning, Mellody! You are joining us this morning with some reminders for our taxes.

 Mellody: I am, Tom. I know it is not always a favorite topic, especially to kick off the week, but it really is important to start looking ahead to tax time. This past week, the IRS officially opened tax season by beginning to accept tax filings for 2015. So, while no one wants to think about it, it is time to start getting organized and get those filings in! It is important to prepare for your taxes as early as possible and for years past. You never know when the tax man might want to dig a little deeper! But I promise it is not all preparation! I also come with some tips that may save you some money.

Tom: Let’s kick it off with the paperwork stuff. What paperwork and documentation should we be assembling now?

Mellody: First things first: you need to make sure you have hard copies of all financial exchanges that impact your taxes. The most important of these are your W2 form, which documents your pay from your employer or 1099s, if you are self-employed. The most critical information for your income taxes will come from these documents. The next category of documents that you want to assemble are those that will allow you any deductions or tax breaks. Think receipts: the donations you made to Goodwill, the tuition bills, child care expenses, all of which are deductible. Record the expense and why it justifies the deduction. Store this information with or on the receipts. If the purchase was a business tax-deductible expense, the same rules apply.

Secondly, you need to make sure you have received your investment statements and retirement records, and keep them with your other tax documents. Your tax bill is calculated based upon a number of factors, and without the entire history of these records, the IRS could argue that the entire value of some investments can be treated as income gain. In terms of any portfolio, you are always better safe than sorry when it comes to the IRS.

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Finally, assemble all of your important family documents – marriage licenses, custody agreements, and estate planning documents like wills and insurance policies, and contracts, and other legal documents. Property records, deeds and titles are also very important to keep.

 Tom: Once we assemble them, how should we keep these records, and for how long?

 Mellody: You should have the hard copies of these documents, and archive all of these documents electronically, ideally on a cloud-based platform. This way you will have access to all of them in the event that an emergency like a flood or an earthquake destroys your hard copies.

In terms of how long to keep records, save all of your tax returns and documents for at least 7 years. This is important. It may seem like a long time, but keeping your tax returns and the supporting documents in order for this long is important. The IRS can audit your return for up to three years from your filing date. However, the three-year limit only applies to good-faith errors. If they suspect any problems were intentional, they can go back 6 years or more, so 7 years is a safe time period.

 The reason that you want to keep all of this? Because tax court is one of the few places where failure to report proof of claims results in an assumption of guilt. So, whenever the IRS challenges you, the burden of producing evidence that your claims are true rests on you, so you better have your documentation in order!

 Tom: What else should people know?

 Mellody: Well, Tom, I promised you it wouldn’t all be about organization, so I have a few tips on possible savings. First, despite rumors that some of the most valuable homeowner deductions might be eliminated or modified, taxpayers were spared. In mid-December, Congress passed the Protecting Americans From Tax Hikes Act of 2015. Many exemptions that would have expired were extended, and others were made permanent. The included the exemption for private mortgage insurance to protect the mortgage holder; the tax credit for energy-efficient home improvements; and the exclusion for mortgage-debt forgiveness for owners of a foreclosed or short-sale home.

Other exemptions that you might be able to take advantage of are expenses that you incurred during a job search or moving for a job. Also, be sure to get your deductions for state and local taxes. Finally, if you have someone prepare your taxes for you, that is also deductible. Just remember, there are a number of savings out there, and they are easy to take advantage of if you are organized and prepared!

Tom: Thanks for getting us in gear for tax season, Mellody! Have a great day!

 Mellody: Thanks for having me, Tom! Less than 3 months until April tax time, so make sure you take the time to get organized!

 

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