I am reminded that people forget what records they need to keep and what deductions are allowed.
Last month at a professional meeting of enrolled agents in Savannah, I learned that many tax professionals no longer send out organizers but rather send a letter asking their taxpayer clients to call their preparer if they want one.
Up to half of our clients do not want or need an organizer and would rather not have to deal with excess paper to be thrown out. Generally, those individuals have pretty consistent tax returns, and their record keeping is minimal.
But for others whose returns change because of changing circumstances, here are some items to be retained.
Mileage and other travel expenses are the most unreported items in anyone’s tax return.
Get a cheap pen or pencil and calendar or pad and put it in every vehicle you own or drive. Write down your mileage and location when you go for medical purposes, business related mileage, charitable driving (except weekly religious or spiritual services), and related bus, train or airfare.
Be sure you maintain a log.
The Tax Court has upheld IRS denial of mileage when records are not kept and the taxpayer used estimates. Travel expenses also include related hotel-motel expenses and some meals.
Most homeowners and investors know to keep records of mortgage interest and taxes paid on their real estate and vehicles.
But too many throw out the HUD form issued to them when the real estate was purchased. These documents are needed to establish “basis” to avoid or reduce capital gains taxes when selling the real estate.
For investment property, the original appraisal is required to calculate depreciation. On rental real estate, you must depreciate the improvements but not the land.
Upon sale of the property there is a recapture of the depreciation, which means you pay taxes on the amount you depreciated, but why pay more than required?
The only ways out of not paying on recapture is to either never sell the property or to leave it to an heir in your will, who then establishes a new basis based on the value at the time of inheritance, or the six months later if the property has not been sold in the interim.
For married couples, basis might change if one spouse dies and the surviving spouse subsequently sells the property.
As usual, if you have questions ask your tax professional for help. Do not rely on calling the IRS. More than half of the calls are unanswered due to lack of staff.
If you do get through, try to get the name and badge number of the IRS employee.
You might or might not get a correct answer. Do not be surprised if you get through only to be hung up on by an employee who does not know the answer.
If you make a point of getting the employee’s information, there is less chance of a hang-up.
Also ask where they are located in case you get a really good, competent person and want to write a letter of compliment.
Virginia Moryadas is a tax preparation professional in Bluffton.