Gathering the Documents Needed for Complete Returns
No matter what country or state returns need to be completed, having access to important records makes the filing easier and more accurate. United States returns require documentation on income and expense that substantiates items on the return.
Documenting Income for the Tax Return
Employees will be issued a W-2 form, the Wage and Tax Statement. This form contains the earned income, as well as taxes deducted. Other important pieces of information on the W-2 are retirement and dependent care deductions.
Other income items are reported on one of the various 1099 forms. This may include earned income in a non-employee situation, such payment on a contract. Interest is reported on 1099 INT.
Brokerages will provide a 1099 form listing interest and dividend income, as well as investment purchases and sales of stock, mutual funds and options. Proceeds and costs of these items are reported on Schedule D.
Refunds from state and local taxes are reported on a 1099, and this income must be reported in the current year if the taxpayer claimed the payment of these taxes as an itemized deduction in that prior year.
Documenting Deductions from Income
It is a legal requirement to report all income. It is not a requirement to report all deductions, but a taxpayer will want to reduce taxes by claiming all deductions to which they are entitled.
Therefore, it is important to find all the deductions allowable. Good record-keeping makes this possible. Keeping track of all checks written during the year, or at least maintaining copies of checks to be reviewed at tax time will assist with finding deductions.
It is also helpful to maintain copies of credit card statements, which document expenditures. Types of items that may be deducted in some circumstances:
- Charitable contributions. Donations over a certain amount must be acknowledged by the receiver, but reviewing the checkbook or statement may help to prompt the memory.
- Unreimbursed employee expenses which may be deducted, such as union dues and job travel.
- Medical expenses are deductible over a percentage of income. Bills paid by credit card are deductible in the year charged, regardless of when the credit card is paid off.
- Tax preparation fees. These are deductible in the year paid, not the year that the tax return covers.
Miscellaneous Tax Documents
If the taxpayer owns investment property, documents relating to taxes paid and depreciation will be required to complete the return. If there is rental property, all documentation of rental income and expenses are needed. It is advisable that separate records (checkbooks, ledgers) be maintained.
Whether the taxpayer completes the forms manually, on tax software or pulls the information for a tax preparer, having all the documents at hand will help to make preparing the return efficient and accurate.