LGH Consulting, Inc.

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Good tax planning includes good recordkeeping

Tax planning should happen all year long, not just when someone is filing their tax return.  An important part of tax planning is recordkeeping. Well-organized records make it easier for a taxpayer to prepare their tax return. It can also help provide answers if a taxpayer’s return is selected for examination or if the taxpayer receives an IRS notice.

This tip is one in a series about tax planning. These tips focus on steps taxpayers can take now to help them down the road.

Here are some suggestions to help taxpayers keep good records:

  • Taxpayers should develop a system that keeps all their important info together. They can use a software program for electronic recordkeeping. They could also store paper documents in labeled folders.
  • Throughout the year, they should add tax records to their files as they receive them. Having records readily at hand makes preparing a tax return easier.
  • It may also help them discover potentially overlooked deductions or credits. Taxpayers should notify the IRS if their address changes. They should also notify the Social Security Administration of a legal name change to avoid a delay in processing their tax return.
  • Records that taxpayers should keep include receipts, canceled checks, and other documents that support income, a deduction, or a credit on a tax return.
  • Taxpayers should also keep records relating to property they dispose of or sell. They must keep these records to figure their basis for computing gain or loss.
  • In general, the IRS suggests that taxpayers keep records for three years from the date they filed the return.
  • For business taxpayers, there’s no particular method of bookkeeping they must use. However, taxpayers should find a method that clearly and accurately reflects their gross income and expenses. The records should confirm income and expenses. Taxpayers who have employees must keep all employment tax records for at least four years after the tax is due or paid, whichever is later.

The IRS has several online tools taxpayers can use to stay updated on important tax information that may help with tax planning. In addition to visiting IRS.gov, they can download the IRS2Go app, watch IRS YouTube videos, and follow the IRS on Twitter and Instagram.

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Volunteering for charity: Do you get a tax break?

If you’re a volunteer who works for charity, you may be entitled to some tax breaks if you itemize deductions on your tax return. Unfortunately, they may not amount to as much as you think your generosity is worth.

Because donations to charity of cash or property generally are tax deductible for itemizers, it may seem like donations of something more valuable for many people — their time — would also be deductible. However, no tax deduction is allowed for the value of time you spend volunteering or the services you perform for a charitable organization.

It doesn’t matter if the services you provide require significant skills and experience, such as construction, which a charity would have to pay dearly for if it went out and obtained itself. You still don’t get to deduct the value of your time.

However, you potentially can deduct out-of-pocket costs associated with your volunteer work.

The basic rules

As with any charitable donation, to be able to deduct your volunteer expenses, the first requirement is that the organization be a qualified charity. You can check by using the IRS’s “Tax Exempt Organization Search” tool at https://www.irs.gov/charities-non-profits/tax-exempt-organization-search.

If the charity is qualified, you may be able to deduct out-of-pocket costs that are unreimbursed; directly connected with the services you’re providing; incurred only because of your charitable work; and not “personal, living or family” expenses.

Expenses that may qualify

A wide variety of expenses can qualify for the deduction. For example, supplies you use in the activity may be deductible. And the cost of a uniform you must wear during the activity may also be deductible (if it’s required and not something you’d wear when not volunteering).

Transportation costs to and from the volunteer activity generally are deductible — either the actual expenses (such as gas costs) or 14 cents per charitable mile driven. The cost of entertaining others (such as potential contributors) on behalf of a charity may also be deductible. However, the cost of your own entertainment or meal isn’t deductible.

Deductions are permitted for away-from-home travel expenses while performing services for a charity. This includes out-of-pocket round-trip travel expenses, taxi fares and other costs of transportation between the airport or station and hotel, plus lodging and meals. However, these expenses aren’t deductible if there’s a significant element of personal pleasure associated with the travel, or if your services for a charity involve lobbying activities.

Recordkeeping is important

The IRS may challenge charitable deductions for out-of-pocket costs, so it’s important to keep careful records and receipts. You must meet the other requirements for charitable donations. For example, no charitable deduction is allowed for a contribution of $250 or more unless you substantiate the contribution with a written acknowledgment from the organization. The acknowledgment generally must include the amount of cash, a description of any property contributed, and whether you got anything in return for your contribution.

And, in order to get a charitable deduction, you must itemize. Under the Tax Cuts and Jobs Act, fewer people are itemizing because the law significantly increased the standard deduction amounts. So even if you have expenses from volunteering that qualify for a deduction, you may not get any tax benefit if you don’t have enough itemized deductions.

If you have questions about charitable deductions and volunteer expenses, please contact us.

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