Why Record Keeping Is Essential for Paying Taxes Accurately
Tax season is when accounting firms earn their weight in gold. For the average taxpayer, paying taxes is an afterthought until the yearly tax filing deadline rears its ugly head. All of a sudden, people find themselves in a panic as they try getting all their ducks in a row to make sure taxes are paid on time. It can be stressful, but keeping accurate records can save all the headaches come April. The purpose of record keeping is to keep yourself in right standing with the IRS, while also making sure you aren’t overpaying them. Either of these two situations aren’t ideal. Here is what you can do to be in right standing with the IRS while also paying exactly what you owe. We are going to look at both keeping records of incomes well as tracking expenses. These records will ensure your taxes are done correctly and will relieve any IRS worry hanging over your head.
Income
The government wants to know how you are making money. If you are honest and upfront when expressing this on your tax filings, you will prevent them from getting involved. You want to keep track of both earned income and unearned income. Earned income is income that is made in exchange for work done for an employer or income earned by work done for yourself. Unearned income is money received that wasn’t directly worked for. Here are examples of these two income types.
Earned – Salary/Wages.
These are wages earned from your business entity or an employer. If you own a business, it is your responsibility to keep these records. If you work for an employer, this information is provided by a W-2 and can be used when filing your 1040.
Earned – Tips/Commissions.
If you receive tips from an employer, it is your responsibility to keep track and report them (unless the total is less than $20/mo). When tips are tracked properly and reported to your employer, they will appear on a W-2 form in box 1. Depending on employment status, commissions should be tracked and expressed on a 1099 or W-2 form as well.
Unearned – Social Security/Unemployment.
You should receive 1099 forms for your unearned income whether it is retirement payouts, social security payments or unemployment benefits. Once tracked, these will be reported on your taxes and will impact your taxable income.
Unearned – Interest/Dividends.
These forms of income should be reported on schedule B of a 1040 form. They are reported to you on a 1099-INT or 1099-DIV form. You want to make sure this information is making it onto the 1040 to account for all taxable income. This will ensure right standing with the IRS. Failure to do so could present red flags and warrant an audit.
Expenses
In some cases there are exemptions taxpayers receive for their income tax, which then adjusts their gross income (AGI). Keeping track of these opportunities is important to avoid overpaying on your taxes. Below, we’ll describe some exemptions and the impact they have on income tax.
Charitable donations.
By keeping track of charitable donations throughout the year and itemizing them on your taxes, you are able to deduct up to 50% of your adjusted gross income. Donations must of course be made to qualified organizations (eg. 501c3).
Medical.
It is important to keep track of medical records and expenses because it helps with making the best health insurance decisions. It can, but is not always, advantageous to report itemized medical expenses on your taxes. You have to know your standard deduction amount. All deductions, including charitable donations, mortgage interest, and medical deductions, must be greater than the standard deduction. The first 7.5% of your AGI does not count towards deductible medical expenses. If you are someone with a lot of out-of-pocket medical expenses, it is definitely worth keeping these records.
Child Care.
Depending on your income, you may be able to deduct 50% of childcare expenses. The maximum credit for one child is $8,000 and $16,000 for two or more children. Keeping track of these records could certainly help insure accuracy on your tax filing.
Business.
Keeping track of business expenses does two things. It keeps you in right standing with the IRS and also prevents you from overpaying. Here are a few examples of business expenses that can be itemized on tax filings.
- Professional Dues – Whatever fees that are paid to be a part of a professional organization must be kept track of.
- Supplies – Paper, printer ink, pens, dry erase marker etc. should be tracked as business expenses under supplies. The best way to think of this is essential office needs.
- Education – The American Opportunity Tax Credit (AOTC) can be utilized for tuition expenses, making them worth keeping records of.
- Auto – If your vehicle is used for business/work purposes, then auto expenses can be tracked and used as a tax deduction. Some examples of these expenses would include gas, tires, insurance, tolls, and lease fees.
- Travel – If these expenses are used for business, they may be deducted and are worth tracking. Examples would be airfare, lodging and meals.
Accounting is done to track your money for the purpose of having a zero balance with the IRS. This prevents any legal issues and also prevents overpaying the IRS. We encourage you to do all you can to keep accurate records of every type of income and all of your expenses so you may accomplish the goal of having a ‘Perfect Balance’. Our accounting, payroll, and tax services are here to help you avoid any potential problems with the IRS or any financial regulatory agencies. Our Mt. Pleasant location serves Racine, Kenosha and other southeastern Wisconsin clients. If you have questions about keeping records of your income and expenses, contact us today!