There are two keys to organizing your paper work before preparing your income taxes: 1) use common sense and 2) know some of the basic rules.
While it is important to have the receipts for medical expenses, charitable donations or purchase and sale of securities, it is more important to ensure that you have the correct information and any supporting documents, said Barry Edelman, a Certified Public Accountant in San Antonio, TX.
When clients come in to begin working on their income taxes, Edelman wants them to understand how to avoid the common mistakes, such as not keeping a list of clothing that is donated or misunderstanding the rules regarding long-term capital gains.
The most common mistakes, he said, do occur with charitable contributions, the result of “not having all the documents and not keeping up with the rules.”
For example, when you donate clothing, you must have a list of the items noting their fair market value and the condition. No socks or underwear are allowed, by the way. If the total value is more than $500 you must file a form with the return. If under $500, you should have the list handy in case of an audit.
The same with donations to your church, Edelman said. It is not enough to say you drop $20 into the plate each Sunday. It is safer to use the envelopes provided by the church and keep the notice the office sends out each year.
Simple record-keeping errors can result tax problems, even with the required documents. For example, you purchase an equity on Jan. 8, 2008 and sell it Jan. 9, 2009, thinking you have met the one-year holding rule to qualify for a long-term capital gain.
The rule is the year starts the day after the purchase Jan. 9, 2008 and the equity must be held for more than one year until Jan. 10, 2009 in this case.
There are certain cases in which record-keeping is especially important. One would be in the case of a divorced couple keeping track of child expenses. Edelman said that for the most part “dependent cases are pretty well worked out. It depends on who is entitled to take the child as a dependent.”
Overall the key, Edelman said, is to stay prepared during the year.
“There is a lot of literature out there,” he said. “There are lots of books, lots of things are always on the Internet and in the bookstore.”