Income Tax Document Roundup

July 31st, 2008

If you haven’t begun to do so already, you will soon begin to sort through a year’s worth of accumulated cancelled checks and receipts to identify the items you need for preparation of your tax return. Bear in mind, however, that in some cases a cancelled check or other proof that you paid an expense is not enough to support a deduction or a tax credit. For example, here’s a quick rundown of special substantiation requirements for some common deductions and credits:

Alimony: If you pay alimony you will need a copy of the divorce decree, separate maintenance agreement, or other documents that specifies the basis for your payments. You should also have a record of the name and address of your ex-spouse to whom the payments are made.

Credit for the elderly or disabled: If you are over age 65 you may claim the credit for the elderly or disabled without any special documentation. However, if you are under age 65, you must obtain a statement from a physician certifying that you were permanently and totally disabled on the date you retired. If you are and veteran and were determined to be disabled by the Department of Veterans Affairs (VA), you can substitute VA Form 21-0172, Certification of Permanent and Total Disability, for a physician’s statement. The statement or VA form does not have to be filed with your return, but must be retained with your tax records.

Charitable contributions: To substantiate deductions for charitable contributions, you will need cancelled checks other proof of payment showing the donee’s name and the date and amount of the contribution. In addition, for contributions of $250 or more to a particular charity, you must get a written acknowledgement from the charity; a cancelled check is not enough.

Contributions of property are also subject to special substantiation rules. In addition to proof of the donation (and an acknowledgement for gifts of $250 or more), you must have documents showing a description of the property and the place the donation was made. Documentation should also include a description of the method used to determine the fair market value of the property, a signed copy of any appraisal reports, and a copy of any agreement with the charitable organization regarding the use of the property. For property valued between $500 and $5,000, you will need documents showing how and why you acquired the property and the cost or other basis of the property (except for publicly traded securities) if the property was held for less than one year. For property valued at more than $5,000 (more than $10,000 for nonpublicly traded stock), a qualifying appraisal is required.

Dependent care credit: In order to claim a dependent care credit, you must provide the name, address, and taxpayer identification number for any person or organization that is engaged to provide care for a child or dependent. You can use IRS Form W-10 to obtain this information from the care provider, although use of an official form is not required.

Earned income tax credit: If you will claim the earned income tax credit on your 2003 return, you should be particularly careful to substantiate you claims. The IRS has launched a new reform initiative to reduce EITC noncompliance. In particular, in connection with this initiative, some EITC claimants will be required to certify that the child with respect to whom the credit is claimed for 2003 met the residency requirement by having lived with the taxpayer for more than half the year.

Business expenses: If you own a business, you must have detailed records showing the amount, date, and, business purpose of asset purchases and payments for services. And, course, records must establish proof of payment.

Employment records: If your business has employees, you will need a complete record of each employee’s name, job, Social Security number, total amount and date of each wage payment, wages subject to withholding, amount of tax collected, employee W-4 forms, and any agreement with the employee regarding additional withholding.

Travel and entertainment expenses: The IRS is skeptical of T&E expenses—and it does not accept “guesstimates.” You must substantiate your deductions with a diary showing the amount, time, place, and business purpose of each expense. In the case of entertainment, the business relationship of the guests must also be noted. Receipts are also required for all lodging expenses and for any other expenses over $75.

If you have any questions about these other record-keeping requirements, please feel free to contact our office.

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