Posted: Jan 5, 2011 10:33 AM
Here are some tax mistakes people make that are easily avoidable.
1. Failing to get -- and keep -- receipts. Not getting (or keeping) receipts is probably the most common error taxpayers make. It's not just business expenses that need to be documented; charitable and medical expenses should be documented as well.
With respect to charitable donations, all charitable donations of cash (or cash equivalent), no matter what the amount, must be supported by written documentation. This would include checks, money orders and credit card sales, so long as you can clearly identify the donation portion. If you donate cash, you must get a receipt, or you may not take the donation.
To substantiate in-kind donations (meaning donations of goods), you need to obtain a receipt from the charitable organization with the name of the charity, the date of the gift, the location of the charity and a detailed description of the property donated. Be as specific as possible.
Medical and business expenses can be documented by check, money order or credit card receipt. If you pay in cash, always get a receipt. No matter what form of payment you use, it's best to annotate each receipt with a short description to memorialize the purpose of the payment. "Parking to see Dr. H" or "Post-It notes for the office" with the date and amount would be sufficient.
Once you have the receipts, hold onto them. Every taxpayer has his or her own system for keeping track of receipts. It doesn't matter what system you use, so long as receipts are easily accessible and properly documented. One of the easiest ways to get organized -- and not have to sort through piles of receipts -- is to scan in your receipts, using a product like Neat Receipts. The IRS has accepted scanned receipts since 1997. You can read more about scanned receipts from the IRS at Rev. Proc. 97-22. Your scanned or electronic receipts must be as accurate as your paper records. If you scan receipts, you'll need to have your records organized and be able to produce them in a hard copy form if needed.
2. Forgetting to write down mileage. Don't fall into the trap of believing you don't drive enough to take mileage deductions on your tax return. Not only can you take deductions for business mileage (see our prior post on this), but you can take mileage deductions for medical visits, charitable donations and job-related moving expenses.
Trips to the doctor, hospital, and specialists are deductible on your Schedule A as part of your medical expenses. Keep a record of the date, time and purpose of the trip, as well as the distance traveled.
If you donate your time for a charitable purpose, you can similarly claim a deduction on your Schedule A as part of your charitable donation. While you cannot deduct the value of your time, your out-of-pocket expenses are deductible -- and that includes mileage driven as a volunteer. Again, keep a record of the date, time and purpose of the trip, as well as the distance traveled.
A tried and true method for records is a mileage log, best kept in the car, where you write down odometer readings when you go on a trip for business, charity, or medical reasons. You can also use a GPS or other mileage-tracking feature to help you record your trips and the purpose of each.
3. Failing to keep your business life separate from your personal life. This is perhaps the easiest mistake to make, since we all live such busy lives. It is, however, important to keep deductible expenses separate from personal expenses.
Personal expenses are exactly what they sound like: expenses for personal or family use as opposed to business use. So, when you're running to the grocery store to pick up something for your child's bake sale, try to avoid throwing the coffee for the office into the cart, too, unless you're religious about submitting expense reports.
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