With tax season right around the corner, you'll soon be inundated with forms and records from various sources. Remember, all of this information has been provided to the Internal Revenue Service, which will compare its numbers against the ones on your tax return. If you fail to report something on your return, your friends at the IRS will probably take an unhappy interest in its absence. Whether you do your own taxes or use the services of a tax pro, here's a list of some of the records you should keep handy when preparing your taxes.
Keep confirmation reports of purchases and sales of investments, including the execution prices and trade dates. Make sure the information is consistent with the numbers your broker will provide you on Form 1099-B. The date on which you sold securities is critical if you want to take advantage of the new lower tax rates for long-term capital gains. Remember, though: This is only half of the story. You'll also have to review and research your records to report the purchase date and price of the stock or investment.
Keep all statements and reports sent to you by your brokerage, mutual fund, 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).
If you participate in a dividend reinvestment plan (for stocks or mutual funds), keep track of the dividends you receive, how many shares they purchased, and at what price. This information is necessary to help you calculate the new cost basis for your shares. And don't forget to claim the new lower tax rate on any qualified dividends you receive.
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 taxes again when you eventually withdraw your funds. You should receive year-end account statements and receipts for your contributions.
If you make contributions to a Roth IRA, make especially sure that you keep your contribution information. There is no place on the actual tax return to report Roth IRA contributions, but it's important to 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. 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.
And if you did make a contribution to an IRA, SEP, 401(k), 403(b), or any other qualified plan, don't forget to see whether you qualify for the retirement savings credit. Essentially, if your adjusted gross income is $50,000 or less ($25,000 or less if you're single), you'll qualify for the credit. The lower your income, the higher your credit.
Family and home
If you own a home, rental, or investment property, remember to keep that year-end mortgage interest statement (1098) that you'll receive from your lender. In addition, 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-gains exclusion regarding the sale of your home. But while Congress giveth, it can also taketh away. Future law changes might restrict (or even eliminate) the home-sale gain exclusion, so keeping these records is always a good idea.
Charity and miscellaneous
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. Your deduction will be based upon either the cost of the original shares or the fair market value of the shares donated. And if you donated goods, such as a car, boat, or airplane, to your charity, make sure that you have the appropriate documentation and completely understand the new rules.
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.
If you plan to deduct travel or meal expenses relating to investment-related travel, keep records of exactly what the trip involved. Bear in mind that many investment-related trips are not deductible, including travel to attend a shareholder meeting or an investment seminar. IRS Publications 463 and 550 will give you more details.
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.
It sounds silly, but I'm only slightly exaggerating. More and more, employers and institutions are charging fees to provide duplicate information. Even if they helpfully provide duplicate documents at no charge, the waiting time involved might be extraordinarily long. Make sure you review each and every piece of mail that arrives this time of the year. If you're not sure what it is, or how it might affect your taxes, simply toss it in a file for closer review at a later date. If you simply toss it in the "round file," you might end up wishing you had it when you sit down to prepare your tax return.
When he's not dealing with tax issues, Roy Lewis is a motivational speaker who lives in a trailer down by the river. He understands that The Motley Fool is all about investors writing for investors. You can take a look at the stocks he owns, so 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.