I am sure some out there may disagree but I think a household is very similar to a business. In fact, the more I work with my business and manage my household, the more convinced of this I am. Please note I did not say family. A family is a whole other dynamic and entity. Rather, I said household. Hear me out on this please because it is important to how I see record keeping for taxes can become much easier and manageable.
A corporation has operating costs and external expenses. It earns an income and makes a profit because of it’s work force’s efforts. A business has a CEO/board, human resources, accounting and finance personnel, those that work in operations and laborers. It has a need to manage employee relation issues, operating protocol, operates on a budget and pays bills and taxes. Its employees and business heads all deal with daily operations. A household has all of these in common and more with a business.
Think about it. Utility bills, home owners insurance, mortgages, property tax, auto insurance, groceries, medical expenses, etc. are all operating costs and external expenses. If you and/or your spouse works, then you are bringing in income to the household. And if you pay each other a “salary” and/or impound then your household makes a profit from your work. Every member of the household is similar to employees as they are the body that makes the household work. If you run a budget, pay bills, save for vacations and big ticket items then you work in accounting. If you cook, clean, do yard work, and other operations of the household, then you are working in operations. If you have ever stopped an argument between kids or tried to sort one out with your spouse, then you are an expert in employee relation issues. And if you are married, head of household or single, then you and your spouse are the household’s board/CEO. See, very similar to a business.
That said, when we run our household, remember not our family, but our household based on principles used in business, then our household runs more efficiently. That’s where I got my principles for making taxes and recorded keeping more manageable. It involves diligence on the front end by developing your systems but when it comes to tax time, life gets so less stressful.
Know What You Need to Keep
While a business and a household share the basic principles, what they can deduct is different.* I’m going to focus on households and making personal tax filing and record keeping easier. If you are a business owner – web oriented, home based, or retail location – you should always seek a tax professionals for specifics on what is deductible and reportable in your particular business. Even personal taxes can be complicated so make sure to talk to your tax professional about what you should specifically include based on your own personal situation.
Employers/Retirement – These consist of your W-2, 1099’s, commission/bonus statements, social security year end statements, unemployment year end statement, pensions/retirement income statements and any foreign income statements.
Assets – Think capital gains. These include interest bearing accounts (bank checking, savings, CDs, MMAs, etc.) year end statements, sale of a home/stock/bond/car (these often depreciate), etc. making sure to have both the buy and sell dates and prices, rental income, dividend accounts, etc.
One-Time Sources – These can be gifts that in sum or whole exceed $14,000 for the year from a single source (copies of checks or payments), lottery winnings (statement/documentation), inheritance, prizes won, etc.
Other Sources – You will need to keep documentation of alimony/spousal support received (this is income to the supported spouse but a deduction to the supporting spouse), royalty payments, military benefits, worker’s compensation, public assistance, annuity or structured payouts, etc. Even your previous year’s state tax return can be considered income. Your tax professional will help clarify what specifically counts as income in your situation.
Real Estate – You should always save documentation on real estate but specific to taxes you will want to save rental expenditures, change of hand documentation for sales, purchases, refinances, and foreclosures that include date and price/amount owed, year end mortgage statements showing interest paid, and moving costs and distance for move.
Work – If you incur business expenses that your company does not reimburse you for or doesn’t give you an allowance for the costs, then these can be tax deductible. Keep records on business meals purchased, a mileage log of business miles (these are miles driven by you in your vehicle from your place of employment to another business related site and back such as client meeting), gas and car maintenance, required uniforms, union or professional dues, supplies purchased, etc.
Record of Major Losses – These can be fire, theft, accidents, in personal property such as home, car, recreational vehicles, jewelry of value, personal household items, etc. Insurance documentation can assist with this.
Energy Efficient Purchases or Items – Thanks to various acts by Congress, there are quite a few deductions available for household improvements such as windows, solar, etc. and hybrid/electric vehicles. Purchase information with price, sales date, etc. should be saved.
Charitable Contributions – I personally love donating to charities whether its my time, gently loved items, or money as I enjoy giving to others. It has an added advantage of being deductible on your taxes. But not ALL charitable donations are deductible. Donations must be proven with a receipt, letter from the non-profit organization, cancelled check, etc. Plus, receipts must say “no goods or services were provided” by the charity. For example, if you write a check to Salvation Army, their receipt must have that statement on it for you to deduct the cost. Sorry but you can’t consider those girl scout cookies you bought a donation.
Exceptions do exist. If you purchase an item at a charity’s auction, then the receipt must specifically list what was the exact value for the item purchased AND what portion above and beyond the value of the item is deemed a donation. My husband and I attend a local school fund raising event annually. You must buy tickets and there are auction items and items for purchase available. I love that they send us a receipt specifically itemizing: Cost of Item, Monetary Value of the Item, and Donation Portion. This makes it really easy but this must come from the charity itself.
When donating physical goods, make sure you take photos of exactly what is getting donated, make an itemized list with fair market price (I use yard sale/flea market pricing as a general rule) for each item AND get a receipt from the charity.
Just a quick note about charitable donations. If you donate more than $500 per charity, you must itemize. Keep that in mind as you spread the love with your kind acts.
Education – Not just for your kids any more. These can and do apply to you and/or your dependents. Keep records of tuition, books, supplies, living expenses, student loan interest paid, grants, etc. This includes trade schooling as well. (Thank you upholstery class!) You will need a separate form for this but your tax professional should have it.
Taxes Already Paid – Many people do pay taxes in advanced based on a potential of owing at the end of the year. Technically anyone who works for an employer and gets a paycheck does this because taxes are taken out. But others do so if they have additional sources of incomes such as businesses, rental income, etc. You should keep record for these prepaid estimated taxes showing the amount and date paid.
Medical – Most people almost always end up taking the standard deduction but you never know. Since I have almost always paid out of my pocket for private insurances (self-employed) and having had a few medically/dentally challenging years, there have been times I have exceeded the standard deduction. You would be surprised what counts. Keep records of premiums for ALL health related insurances (medical, dental, vision, long term care, disability or accident insurance), co-pays, lab fees, prescription costs, medical caregivers, medical supplies (prosthetics, needles, catheters, etc.) and even TRAVEL (this one was new for me this year)!
As always, make sure to run your expenses by your tax professional as not all medical is deductible. For example, cosmetic procedures (reconstructions such as breast reconstruction after cancer is deductible to my understanding) are not covered but fertility procedures are.
Also, be aware that this year it is extremely important that if you have private/self-paid insurance (i.e. – not paid through a wage deduction or employer-paid), you need to keep record on all household members of coverage information, months covers, and any credit, if any, received. The Affordable Care Act took effect this last January 2014.
So in order to keep record keeping manageable, its critical in my book to know what to keep. Once you know what to keep, then you can figure out the efficient way to track it. So that will be my next post – Managing the Paperwork.
*Disclaimer: I am not a professional tax advisor or representative in any manner. I am sharing research I have found while preparing my taxes this year. The above is meant to be general information and to invoke thought. They are in no manner to be seen as advise or consultation. Please always seek a tax professional/advisor to address the specifics of your life and its tax ramifications.