In order to help you prepare your taxes, regardless if you "do it yourself" or use the services of a tax pro, here is a list of some of the records that you should put aside for the preparation of your taxes.
- Keep confirmation reports of stock purchases and sales, including the execution prices and trade dates. You'll need both your purchase and sale information when you finally sell that stock, and you'll also need it to "match up" the information that your broker will provide you on Form 1099-B.
- Keep all statements and reports sent to you by your brokerage, mutual fund company, or other investment services company, and from other sources. Perhaps most important are 1099 forms, which show your proceeds from sales of securities (1099-B) and other capital assets, as well as interest income (1099-INT), state tax refunds and other government payments (1099-G), dividend income (1099-DIV), Social Security earnings (1099-SSA), and distributions from IRAs, pensions, and annuities (1099-R). Also, if you own a home, rental, or investment property, remember to hang onto that year-end mortgage interest statement (1098) that you'll receive from your lender.
- Keep records of how you acquired any securities (such as through purchase, inheritance, etc.) and your cost basis.
- If you participate in a dividend reinvestment plan (for stocks and/or mutual funds), keep track of the dividends you receive and how many shares they purchase at what price. This information is necessary to help you calculate the new cost basis for your shares. You might set up a computer spreadsheet for each separate plan/stock in order to keep track of these details. For those of you who are not spreadsheet-literate, a three-ring binder can be effective since it will allow you to add sheets of paper when necessary.
- Keep records of contributions to IRAs and other retirement plans. If you make nondeductible contributions to an IRA, make sure you declare these on IRS Form 8606 so that you don't end up paying a second tax on them down the line. You should have year-end account statement as well as receipts for your contributions.
- If you make contributions to a Roth IRA, make especially sure that you keep your contribution information. Remember that there is no place on the actual tax return to report Roth IRA contributions, so you'll have to keep this information "off books." But it's important to record and keep this information in a safe place, since you can remove your contributions tax- and penalty-free at any time, regardless of your age or how long the Roth IRA account has been in place. And if you find that you must close your Roth IRA early, you'll need that contribution information to avoid paying taxes on that part of your distribution.
- If you plan to deduct travel or meal expenses relating to investment-related travel, keep records of exactly what the trip involved. Know, though, that many investment-related trips are not deductible, such as travel to attend a shareholder meeting or an investment seminar. IRS Publications 463 and 550 will give you more details.
- Keep records of improvements made to your home. These can be added to your basis price, decreasing your taxable gain when you sell the home. Additionally, keep records of expenses related to selling your home. They can also be deducted from your capital gains. Many people will tell you that this is no longer required because of the capital gain exclusion regarding the sale of your home. But while the Congress giveth, they can also taketh away. So there might be future law changes that will restrict (or even eliminate) the home sale gain exclusion. So keeping these records is always a good idea.
- If you donate stock to a charitable organization, keep records of what you donated, the day of the donation, your cost basis for the shares, and their fair market value (FMV). Keep track of cash donations, too. You'll want to do this because your deduction will be based upon either the cost of the original shares, or the FMV of the shares donated.
- If you give stock away to a friend or relative in the form of a gift, keep records of what you gave, the day of the gift, your cost basis for the shares, and their fair market value, since the person receiving the shares will likely be required to use your original tax basis for any future gain or loss on the sale of the shares.
- Keep records of expenses for professional help, such as tax preparers and advisors, legal counsel, etc. In fact, keep records (both invoices and cancelled checks) of any and all deductible expenses, just to be on the safe side.
These forms and records are essential, though this list is by no means comprehensive. You may have certain "twists" in your tax situation that will require you to obtain additional records.
Finally, know that you're not the only person who will receive copies of tax-related information from your employer, broker, and mortgage provider. All of this information has also been provided to Uncle Sam's computers by the various organizations. And Uncle's IRS computers will be looking to match this information against your tax return. If you fail to report something on your return, it's likely that you'll be hearing from your friends at the IRS asking you to explain why you filed to report the income or information.
Roy Lewis lives in a trailer down by the river and is a motivational speaker when not dealing with tax issues, and he understands that The Motley Fool is all about investors writing for investors. You can take a look at the stocks he owns as long as you promise not to ask him which stock to buy. He'll be glad to help you compute your gain or loss when you finally sell a stock, though.