When it comes to taking qualified deductions on your tax return, having proper documentation to prove your expenditure is a must. Here are six areas where taxpayers often fall short, costing them plenty during tax filing season and IRS audits.

Save those receipts

1. Cash donations to charity. Donations of cash need to be supported by a canceled check or a receipt from the organization. Donations of $250 or more must have written acknowledgment from the charity at the time of the donation, which means a canceled check and bank statement are insufficient.
2. Non-cash contributions. Additional support is necessary for non-cash donations to prove their value. This includes creating a detailed list of items donated, their condition, and estimated fair market value. While this level of detail is not required for small donations, taking photos and creating a detailed listing of items donated is always good practice.
3. Investment purchases and sales. You need to know the original cost of an investment when buying or selling. Today’s regulations require brokers to report the cost of sales to the IRS, but many of these historical costs are incorrect. So, review your brokerage accounts and correct any errors. It is difficult to defend yourself in an audit when records reported to the IRS are in error.

Keep proper documentation

1. Copies of divorce decrees, alimony, and child support agreements. Because there are often conflicts between two taxpayers regarding who claims a child on their tax return, it’s important to have the necessary proof to defend your position. The same is true with alimony and child support. Keep these documents in a safe place and be ready to use them if necessary.
2. Copies of financial transactions. Keep copies of documents from any major financial transaction. This includes real estate settlement statements, refinancing documents, and any records of major purchases. These documents are necessary to properly record your cost basis in the property. The documents will also help identify tax-related items like mortgage insurance, property taxes, points, and possible sales taxes paid.
3. Mileage documentation. Tracking deductible miles is one of the most commonly overlooked documentation requirements. Recording charitable, medical, and business miles can add up to a large deduction. If the record is unavailable, the IRS will quickly disallow your deduction.

If you aren’t sure whether a document is important, it’s best to retain and file it so you can easily retrieve it later. If you have any questions, please contact our RRBB advisors.