Best Results Organizing

For most people, anticipating tax time falls on a continuum from vague annoyance to full-blown anxiety. Getting organized isn’t a panacea against all that causes us stress, but it can inoculate us against the worst of it. (As Paper Doll always says, organizing can’t prevent catastrophes, but it can help make them less catastrophic.)

In our last two posts, we’ve looked at the basics for getting started organizing for tax time (including making use of the IRS’s new Get Transcript service), and we’ve tried to make some sense out of W-2s and the myriad 1099s and 1098s that organizations and institutions are obligated to provide you.

But what about other documents, the kinds that don’t come on forms? Most will be proof of deductible financial transactions. While some may be provided directly to you at the time (like receipts for deductible expenses), others may be sent as part of correspondence. And, of course, other types of proof will require you do some hunting and gathering.

There are a few main categories to consider.

YOUR HEALTH

You could (and probably should) maintain a folder with the receipts and annotated (paid) statements for all of your family’s out-of-pocket doctor’s visits and other medical care. At the end of the year, flipping through this folder allows you to summarize your medical expenses and determine if you’ve met the IRS threshold for deducting them. If you use a financial dashboard like Mint and are faithful about making sure expenses are assigned to the right categories, you may not have to do any math at all.

For reference, effective this year, you may only deduct medical expenses that exceed 10% of your adjusted gross income. (If you are 65 or older, the old 7.5% applies until 2017.)

If you have health insurance coverage, your company probably creates an annual summary indicating how much health care you’ve used and the amount you paid/owed to medical providers during the course of the year. For example, Blue Cross Blue Shield calls theirs a personal health statement.

The trick is that most people have no idea that their insurance companies create these summaries, as they tend not to be mailed to policy holders. Insurers save mailing costs and hope you’ll know to log into your online account to search for your summary. (If your medical expenses for the prior year are too low to qualify to be deductible, just save a PDF of your summary for your records; don’t bother printing.)

If your insurance company doesn’t create annual summaries, you can usually use the “You Owe” column of the Explanation of Benefits (EOB) that your insurer sends after doctor’s visits, hospitalizations and procedures (and you should definitely be able to log in or call to request copies of these, if you’ve discarded them). If your medical expenses are low, no further effort is needed, but if it looks like you’ll be able to take deductions, using your annual summary or EOBs will give you a handle on which receipts or dated statements you’re seeking for tax support.

In the future, try to be vigilant about saving medical expense receipts, as your EOBs and insurance company summaries are not considered proof of what you spent on deductible medical expenses, only indications of what you owed to medical providers. Collect receipts for:

Medical care expenses: Be sure to only count expenses for which you paid and not portions paid by the insurance company or “network savings.”  (That’s the amount knocked off the bill simply because you have insurance. If you were uninsured, you’d be charged more than the total paid by you and the insurance company!)

Pharmaceutical expenses: Call or visit your pharmacy to request a printout of all pharmaceutical purchases you made for yourself and your children during the prior tax year. (Because of privacy laws, your spouse may have to make a separate request.) Using only one pharmacy for prescriptions is advantageous.

Health Savings Account documentation: For every qualified medical expense you pay through your health savings account (HSA) or medical savings account (MSA), keep a record of the name and address of each person or company you paid and the amount and date of the payment. Since HSAs can be used to cover everything from orthodontia and acupuncture to durable medical equipment and contact lens solution, be sure to save your receipts, and if a receipt doesn’t clearly describe what you actually purchased, make a note at the top to ease your efforts at tax time.

Medically-necessary travel expenses: If you (or a family member) have conditions that require travel for treatment, you can deduct the travel costs. Keep a paper or digital log of the miles driven and use the current IRS standard mileage rate for medical purposes for 2013 (or 2014).

YOUR HOME

Home purchases: Maintain records regarding the purchase (or sales) documentation for a house, as well as records for closing costs, home inspections, fees paid to real estate agents and any records regarding private mortgage insurance.

Casualty and theft losses require documentation. For thefts, you’ll need to have proof of ownership (that’s why we recommend saving “big ticket” item receipts and videoing a household inventory), proof of theft (usually via a police report) and the date that the item was stolen (to proove it falls in the appropriate tax year).

For proof of loss due to casualty, maintain insurance company confirmation letters regarding the date and cause (ice storm, lightning, fire, auto accident, etc.) of a loss, estimates of original costs and costs of repair/replacement vs. what your insurance company will or will not pay (or has paid), and proof of ownership.

Moving expenses relate to actual costs (movers, truck rental, storage, etc.) and mileage. Did you move more than 50 miles in order to work at a new job/location? Check out IRS Publication 521 regarding what you’ll have to document.

Other home-related paperwork to save include:

• Receipts and records regarding any home improvement efforts you’ve made which materially increase the value of your home (which will have a tax implication when you sell).
• Records of purchases for your primary residence that qualify you for the Energy Star tax credits for the applicable year. This gives you credit for 10-30% of costs for energy-efficient purchases, including biomass stoves, various heating/air conditioning devices, insulation, water heaters and windows and doors, geothermal heat pumps, residential small wind turbines, and more.

YOUR HEART

Childcare/Eldercare costs: To take advantage of the Child and Dependent Care Credit, you’ll need documentation of the name, address, and Tax ID number for any care provider you’ve used for your kids or other dependents. Whether you’re using a babysitter from down the street or employing the services of a daycare facility (for either children or adults), use federal form W-10, Dependent Care Provider’s Identification and Certification.

Even if you’re not planning to run for elected office, be sure you’re not running afoul of Nanny Tax rules regarding FICA (Social Security and Medicare) and FUTA (unemployment insurance). Use a Nanny Tax calculator and keep careful records of what you paid, when, what you withheld and what you submitted to the IRS.

Charitable donations: You may get a nice form letter on a non-profit’s stationery, or they may bury your acknowledgment as tiny text in asterisked comments at the bottom of requests for further donations, so be diligent about opening your mail. A charitable contribution confirmation should include the name of the qualifying charitable organization, a date of donation or at least the date of the acknowledgment (i.e., something to prove the tax year of the donation) and a dollar amount (or a description of materials if an “in-kind” (non-monetary) donation was made).

Not every charity confirms donations in writing. For your protection, keep your own records regarding donations  you make. Use the charitable request letter or even a plain piece of paper to mark the date, dollar amount and method by which you paid (check number or credit card name), and file it away. Again, if you use a financial dashboard, identifying all of your donation amounts will be easier. If not, read through your credit card statements and highlight the charitable donations. 

YOUR HEAD

Educational expenses: Higher learning can be deducted and the number and type of credits (the Hope Credit, Lifetime Learning Credit, American Opportunity Credit), Savings Bond programs and more can be dizzying. Just be sure that in addition to keeping your 1099-T (for tuition) and 1099-E (for educational interest), maintain transcripts that show your periods of academic enrollment, as well as canceled checks, credit card statements or other receipts that verify the dates of payment and amounts you spent on tuition, books, lab materials, student fees, etc.

Work-related costs: Un-reimbursed employee expenses may include costs for your vehicle or for travel, meals, entertainment or even client gifts. Unfortunately, you have to itemize and not take the Standard Deduction for these to do you any good, and your combined itemized expenses must exceed 2.5% or more of your AGI. Since you have no way of knowing in January what kinds of expenses your employer might force you to rack up in July, start maintaining a folder for these records right away. If you didn’t save receipts during the year, your credit card should provide proof for the largest of the expenses, like airfare and hotel costs.

Proof of payment for jury duty: Yes, it’s your civic duty, and yes, you probably got paid less per day than what you spent at Starbucks to stay awake in the jury box. You might receive a 1099 if you racked up enough days of service, but be sure to keep your own records regarding this kind of payment. If your employers required you to turn your jury duty payments over them, keep records so you can request an adjustment to reduce your AGI.

Tips: If you work in the food industry or a personal service profession where you receive tips, the IRS expects you to keep track of and report what you’ve made. (Yes. Really.) Use a mobile app like TipCounter or Tip Log to record of the tips you took in and what you were required to “tip out” to other support staff members (like bus boys, shampooers, etc.). If you prefer paper, keep a notebook; the IRS form 4070A is pretty clunky.

Self-employed/small business expenses: If you own your own business, you need a unique, separate filing system for all your business-related expenses, including tax paperwork. Check the classic Paper Doll post Organizing Your Tax Paperwork–Part 3: Get Your Business (Receipts) Off The Ground to make sure you capture all the essentials.

I hope this series of Taxing Conversations helps you ramp up your efforts to organize for tax time. Remember, Paper Doll is a professional organizer; in the language of the web, IANAA (I am not an accountant) and IANYA (I am not your accountant). For individual tax-related questions, please contact an authorized tax preparation specialist or financial planner.