July 5, 2021

The first step of good tax planning is recordkeeping

CD Tax & Financial Blog, Individual Tax, IRS, Tax Records

The first step of good tax planning is good recordkeeping

Year-round tax planning is for everyone.

An important part of tax planning is recordkeeping. Gathering tax documents throughout the year and having an organized recordkeeping system can make it easier when it comes to filing a tax return or understanding a letter from the IRS.

Good records can help:

– Identify sources of income
– Keep track of expenses
– Prepare tax returns
– Support items reported on tax returns

In general, the IRS suggests that you should keep records for three years from the date you filed the tax return and develop a system that keeps all your important information together.

Records to keep include:

Tax-related records

This includes wage and earning statements from all employers or payers, interest and dividend statements from banks, certain government payments like unemployment compensation, other income documents and records of virtual currency transactions. Taxpayers should also keep receipts, canceled checks, and other documents – electronic or paper – that support income, a deduction, or a credit reported on their tax return.

IRS letters, notices and prior year tax returns

Taxpayers should keep copies of prior year tax returns and notices or letters they receive from the IRS. These include adjustment notices when an action is taken on the taxpayer’s account, Economic Impact Payment notices, and letters about advance payments of the 2021 child tax credit. Taxpayers who receive 2021 advance child tax credit payments will receive a letter early next year that provides the amount of payments they received in 2021. Taxpayers should refer to this letter when filing their 2021 tax return in 2022.

Property records

Taxpayers should also keep records relating to property they dispose of or sell. They must keep these records to figure their basis for computing gain or loss.

Business income and expenses

For business taxpayers, there’s no particular method of bookkeeping they must use. However, taxpayers should find a method that clearly and accurately reflects their gross income and expenses. Taxpayers who have employees must keep all employment tax records for at least four years after the tax is due or paid, whichever is later.

Health insurance

Taxpayers should keep records of their own and their family members’ health care insurance coverage. If they’re claiming the premium tax credit, they’ll need information about any advance credit payments received through the Health Insurance Marketplace and the premiums they paid.

Reviewing eligibility for credits and deductions is also an important part of year-round tax planning

Tax credits and deductions can mean more money in your pocket. Most people only think about this when they file their tax return, but early planning can help make filing their 2021 tax return easier.

Here are a few facts about credits and deductions from the IRS that can help you with year-round tax planning:

Taxable income is what’s left over after someone subtracts any eligible deductions from their adjusted gross income. This includes the standard deduction. In fact, most individual taxpayers take the standard deduction. On the other hand, some taxpayers may choose to itemize their deductions because it could lower their taxable income.
As a general rule, if a taxpayer’s itemized deductions are larger than their standard deduction, they should itemize. Also, in some cases, taxpayers may even be required to itemize.
Taxpayers can use the Interactive Tax Assistant to see what expenses they may be able to itemize on irs.gov website.
Taxpayers can subtract tax credits from the total amount of tax they owe. To claim a credit, taxpayers should keep records that show their eligibility for it.
The American Rescue Plan made changes to several valuable tax credits including, the child and dependent tax credit, the childless earned income tax credit, the childless earned income tax credit and the child tax credit. It’s important for taxpayers to understand how these changes may affect the 2021 tax return.

Effective tax planning can help you to minimize your future tax liability and that is where we come in. We can help you keep your hard-earned money without paying a penny more in taxes than you’re legally required to do. And some of the biggest savings can come when we work together and plan ahead. Contact us today!

As always, should you have any questions or concerns regarding your tax situation please feel free to contact us.

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