Start Gathering Your Receipts for Taxes Now
On a recent blustery weekend, I decided to organize my desk. It seemed like a good idea. After all, it’s not like I had any other plans with it being so miserable outside — there’s also a pandemic going around.
As I shuffled through the paperwork that’s been piling up, a rush of feeling overwhelmed swept over me? Why would I bother keeping all these receipts and documents? Couldn’t I have just recycled them?
Sure. Properly discarding all of this paperwork might make life easier. But, there are several reasons why I held onto things like receipts.
For starters, they provide proof of purchase that I might need for a warranty or expense. Usually, this is for more expensive items like appliances, electronics, jewelry, or vehicle repair. Another reason is if you need to return or exchange something, such as a piece of clothing.
Moreover, receipts for taxes are needed when seeking reimbursements or creating a budget. And, they’re absolutely essential when it comes to preparing and filing your taxes. And, as I looked at my calendar, it’s the latter that made this process worthwhile.
Preparing Your Taxes 101
In case you didn’t notice, it’s tax season. Hopefully, you’ve already begun preparing your taxes. But, if not, have no fear. You still have a little bit of time to do so. However, I would get on this ASAP.
Now, I know what you’re thinking; “I have someone do this for me. Why bother?” Au contraire Mon Frere.
Even if you have someone else doing the bulk of the work for you (more than 80 million rely on paid professionals to complete and submit their taxes), you’re still going to have to put in some advance work. I mean if they don’t have the right materials, then how can they file your taxes?
On the flip side, if you’re doing your own taxes, you still need to set aside the time to organize your documents so that it’s a less stressful experience.
Start Gathering Your Receipts for Taxes Now
In either case, here’s a brief rundown of what the process should entail.
Choose a preparer and schedule an appointment.
Chances are that you already have a tax preparer. If not, ask for a referral from friends, family, or co-workers. Just make sure that they have a Preparer Tax Identification Number (PTIN). This is issued by the IRS to Certified Public Accountants (CPAs) and Enrolled Agents (EAs) and allows them to prepare a tax return.
Whether you’re meeting a preparer for the first time or already have someone you trust, you need to book an appointment with. Since tax season is already underway, it usually runs from January 1 to April 15, you should have done this yesterday. Remember, this is the busiest time of year for them.
What’s more, the sooner you meet with them, the sooner will be able to complete your return. As a result, you’ll get your refund faster. Or, if you owe money, it buys you more time to come up with the money you owe. And, for some, this may be the only way for you to get your stimulus check.
Have your tax documents ready.
Now that you’ve scheduled an appointment with a tax preparer, you need to collect the right tax documents. Usually, you’ll receive most of this in the mail by January 31. Be on the lookout for:
- Mortgage interest statements
- Investment income statements
For newlyweds, you might also need the additional documents:
- Form 8822 (if you moved)
- SS-5 (if you changed your name)
- W-4 (to adjust tax withholdings based on your new household income)
Determine which receipts you’ll need.
Next, you also need to assemble your receipts for taxes. But, which receipts do you really need to provide? That depends if you itemize your deductions or claim the standard deduction.
“When you file your taxes, you have two choices: Take the standard deduction or itemize your deductions,” clarifies Ramsey Solutions. “This is a pretty big deal because tax deductions lower your taxable income—and the lower your taxable income is, the smaller your tax bill will be!”
Which option should you take? “Well, the standard deduction for the 2020 tax year for single filers is $12,400 and $28,400 for married folks filing jointly,” they add “If you can write more than those amounts off your taxes for the year, you’re better off itemizing. If not, save yourself the hassle of digging through filing cabinets for old receipts and just take the standard deduction.”
“If you do plan on itemizing deductions, you’ll need proof to back up your claims. So, don’t forget any receipts for deductions and tax credits like:
- Education costs
- Charitable giving
- Medical expenses
When in doubt, it never hurts to reach out to a tax pro and get their advice on how to do your taxes this year.”
What if I lost a receipt?
It happens to the best of us. You might have accidentally thrown away a receipt. Or, maybe you forgot to ask for one during a business trip.
No worries. You can still claim the deduction by using alternative documents that display itemized details. Some examples would be canceled checks, credit or debit card statements, invoices, or written notes. You might be able to use photographs or calendar notifications.
List your personal information.
If you’re single and own one home, this is straightforward. But, if you’re married, widowed, or claim dependents, you’ll need to select the right filing status. And, you’ll also need to have information like the Social Security Numbers of your spouse and dependents.
As a general rule, most people will file either as single taxpayers or married filing jointly.
Furthermore, if you own a second home or sold a piece of property, you’ll also need to know the address, how much you paid/sold for it, the dates it was bought/sold, and the profit or loss.
Do you need you to file an extension?
If you need more time to complete any of the above, you can request an extension. This will give you until October 15 to file.
Just be aware that you must still estimate what you owe and have that filed by April 15 — you’ll also have to pay the amount by then. Why? If not, you’ll be slapped with penalties.
Make it Easier on Your Future Self: The Art of Keeping of Receipts for Taxes
That wasn’t too bad, was it? I hope it. But, if you’re lost in the metaphorical woods, that’s why you have a trusted tax preparer and/or financial advisor. Remember, you hired them for a reason. So, let them do all the heavy work.
What you really need to focus on is knowing what documents, particularly receipts, are needed when filing your taxes. Once you do, you can set up a system so that you know what to keep. Also, this system will keep your records organized throughout the year so that when tax season rolls around, you’re all set to go.
With that in mind, here are some suggestions on how to keep your receipts going forwards.
What receipts for taxes to collect?
You don’t have to keep every single receipt that you’ve accumulated during the course of a year. You only want to keep receipts for eligible tax deductions, such as;
- Medical expenses, such as premiums, co-pays, and even parking.
- Childcare expenses like babysitters, daycare, or day camps.
- Unreimbursed work-related expenses including the cost of tools, equipment, supplies, required uniforms. You may also be able to union dues, memberships, or subscriptions to industry publications.
- Self-employment expenses like office expenses, utilities, insurance, travel, and marketing.
- Contributions to a traditional individual retirement account.
- Student loan interest.
- Home improvement costs and property taxes.
- Home energy-saving costs.
- Tax-deductible donations that total more than $250.
- Documentation for bad debts or worthless securities.
For business owners, you might want to follow the $75 receipt rule. That means you don’t have to keep a receipt for items under $75. The exception would be lodging expenses. But, could/would you stay somewhere for under $75 a night?
And, keep in mind that when you file you can either take a standard deduction or itemize their expenses. For 2020, the standard deduction is $12,400 for single taxpayers. For those who are married and filing jointly, it will be $24,800.
Why’s that matter? If you go with the standard deduction, receipts aren’t as important.
“You would only choose to itemize if your deduction after itemization is greater than the standard deduction,” explains Eric Chen, associate professor of business administration at Saint Joseph College in West Hartford, Connecticut. “However, by choosing the itemization route, the onus is on you, the taxpayer, to keep good records in order to prove, or substantiate, your expense as valid.”
Again, a tax professional will let you know which exact receipts you should keep and if you should go with the standard or itemized deduction.
Organizing your receipts.
Hopefully, you know which receipts to hold onto. However, these tiny pieces of paper can be easily lost or misplaced. To prevent that headache, devise an organizational system.
One suggestion would be to go old school and keep your receipts in separate folders. It may seem outdated. But, it’s effective.
If you used this system, the process is also extremely simple. Whenever you have a bill, receipt, or any important tax document, immediately place it in the right folder. You can keep these organized by category, like:
- Income (like a W-2 or 1099)
- Banking info (mortgage, investments, retirement savings)
- Home and property
- Medical expenses
- Child care
- Charitable donations
My grandfather used this method. And, when I helped him file these documents after he lost his sight, I was surprised at how easy it was. I just took the piece of paper, opened the filing cabinet, and place it into the right folder.
For those of you who are self-employed or have a side hustle, you’ll also need a folder for business income and expenses.
However, you could also step into the 21st Century and go digital. As opposed to stuffing paper into a folder, or even a shoebox, you can scan or take photos of your receipts. For instance, if you had a business lunch, you can snap a picture of the bill to have it saved on your phone or the cloud.
Apps like Shoeboxed, Expensify, Wave, or Veryfi will also categorize and track your receipts as well. Other solutions like Quicken and Mint can export data and transfer data to accounting software like TurboTax.
Make note-taking a habit.
Let’s say that you’re reporting 1099 income and deducting job-related expenses. Any receipt that you submit must also include information like the amount, date, and what type of expense it was.
So, if you met a client for lunch last March before things hit the fan, you should jot down on your receipt where lunch took place, who attended, the date, and the purpose. your receipts will need to include the amount, location, date, and type of expense.
Writing this directly on the receipt saves paper and also prevents you from misplacing this important information if it was written down somewhere else.
But, if you’ve gone digital, some of this is done for you automatically, like the date. And, you can make notes in the app on scanned apps as well.
How long should you keep records and receipts?
It’s recommended that you hang on to your individual federal tax records for at least three years after you file. But, if you failed to report 25% or more of your gross income, you might get audited. If so, the IRS may ask for records up to six years after filing.