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Year-round tax planning is suitable for everyone. An important part of this is file management. Year-round collection of tax documents and an organized record-keeping system can make it easier to file a tax return or understand a letter from the IRS.
Good records help:
- Identify sources of income. Taxpayers can get money or property from a variety of sources. The records can identify sources of income and help separate businesses from non-commercial income and taxable income from non-taxable income.
- Keep track of the expenses. Taxpayers can use records to identify expenses for which they can claim a deduction. This will help in deciding whether to individually list prints on filing. It can also help them discover potentially overlooked deductions or credits.
- Prepare tax returns. Good records help taxpayers file their tax returns quickly and accurately. Year round, you should add tax documents to your files as you receive them to help you prepare a tax return.
- Supporting elements that are reported in tax returns. Well-organized records make it easy to prepare a tax return and help respond when the tax return is selected for review or the taxpayer receives an IRS notice.
In general, the IRS suggests that taxpayers keep records for three years from the date they filed the tax return. Taxpayers should develop a system that holds all of their important information together. You can use a software program for electronic recording. You could also store paper documents in labeled folders.
The records to be kept include:
- Tax-related records. This includes payrolls from all employers or payers, interest and dividend reports from banks, certain government payments such as unemployment benefits, other income documents, and records of virtual currency transactions. Taxpayers should also keep receipts, canceled checks, and other documents – electronic or on paper – that support the income, deduction or credit shown on their tax return.
- IRS letters, notices and tax returns from the previous year. Taxpayers should keep copies of the previous year’s tax returns and any communications or letters they receive from the IRS. These include notification of corrections to action on the taxpayer’s account, economic impact payment notifications, and letters of advance payment of the 2021 child tax credit. Taxpayers who receive advance payment of the child tax credit in 2021 will receive a letter early next year detailing the amount of the payments they are making received in 2021. Taxpayers should refer to this letter when filing their 2021 tax return in 2022.
- Proof of ownership. Taxpayers should also keep records of real estate they sell or sell. You need to keep these records in order to determine their basis for calculating profit or loss.
- Operating income and expenses. There is no specific accounting method for business taxpayers to use. However, taxpayers should find a method that clearly and accurately reflects their gross income and expenses. Taxpayers who employ employees must keep all income tax records for at least four years after the tax is due or paid, whichever occurs later.
- Health insurance. Taxpayers should keep records of their own health insurance and that of their family members. When claiming the premium tax credit, they will need information about all the prepayments they have received through the health insurance marketplace and the premiums paid.
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