Knowing which tax records to keep, and for how long, can help keep your life uncluttered. More importantly, it can help if the IRS decides to audit your tax returns.

Keeping your tax records for three years or so is a good way to prove that your tax returns are accurate if the Internal Revenue Service asks for them. Well-organized records can also make filing your taxes easier and help you from losing sleep over where they are and if you can find them when needed.

This doesn’t mean you have to keep your tax records forever.

What records should you keep?

Start by keeping copies of your tax returns, which can come in handy if the IRS says you didn’t file a return for a particular year.

To avoid problems at a potential audit somewhere down the road, you should keep any documents that support the income, credits or deductions you claimed on your return. These can include:

• Receipts for any itemized deductions
• Bills you’ve paid
• Canceled checks
• Legal papers such as property documents
• Brokerage statements
• Loan agreements
• Travel mileage logs
• Job hunting expenses
• Lottery tickets
• Medical and dental account statements
• Theft or loss documents
• Employment documents, such as W-2 forms
• 1099-B or 1099-INT tax documents from banks, brokerages and other investment firms
• 1099-G form detailing unemployment benefits received

If you don’t have paper documents, then you may have electronic records through your brokerage firm, tax software you use, or from other companies you do business with. 

How long to keep tax records

The IRS recommends keeping all the records you used to prepare your tax return for at least three years from the date the return was filed if no fraud was committed and all income was reported. Three years is also recommended if you filed a claim for a credit or refund after your return was filed.

Generally, the IRS can include returns filed within the last three years in an audit. If a substantial error is found it may add additional years, though it usually doesn’t go back more than six years.

It uses these timelines because they’re the limits to how long the IRS can asses a tax someone owes. Six years is allowed if you haven’t reported income that should have been reported and it’s more than 25% of your gross income shown on the return, or it’s a foreign asset of more than $5,000.

Some notable exceptions to these timelines make it wise to keep certain tax documents longer than three years.

Keep tax records forever if:

• You filed a fraudulent return.
• You didn’t file a return each year.
• You bought property and need to show the amount you originally paid for it. 

Keep tax records for 7 years:

• You filed a claim for a loss from worthless securities or a bad debt.
• Tax forms for retirement accounts such as IRAs that have been closed for seven years.

Keeping tax records longer than the IRS requires

Even though the IRS may not require you to keep some documents longer than three years, you may want to keep them longer because some creditors and insurance companies may require them. 

Consequences of poor record keeping

One of the worst consequences of not maintaining proper records is when facing an IRS audit. If old tax records could help prove your case and you don’t have them, you may have to pay higher taxes. The burden of proof is on you to show that your tax returns are accurate, including keeping receipts and other records.

If your tax returns are wrong, potential tax penalties include:

• Pay back unpaid taxes, plus interest and penalties, up to 25% of the tax owed.
• A prison term, though this is unlikely because the IRS prefers to collect money owed.
• Charged with tax evasion if you intentionally lie on a return or try to deceive the IRS. The maximum penalty is imprisonment of up to five years and $100,000 in fines.
• Your account is given to a collections agency.
• You can’t get a passport or renew one through the United States if you owe the IRS $59,000 or more.

Limitations on refund claims

Another consequence of poor record keeping is that the period of limitations, as the IRS calls it, applies to refund requests just as to tax assessments. 

Suppose you file a claim or credit for a refund. In that case, you generally have three years from the date you filed the original return (or the due date for filing if you filed before that date) or two years from the date the tax was paid, whichever is later, to file an amended claim for the credit or refund.

For overpayment from a bad debt deduction or a loss from worthless securities, seven years are allowed from when the return was due to file a claim.

Benefits of staying organized

Keeping your tax documents organized can make tax time less stressful, allowing you to complete your tax returns on time accurately. You should also be able to avoid an audit, provided you do not underreport income or commit fraud. If problems are found with your return by the IRS, you could end up paying back taxes, penalties and interest, which can be avoided by filing accurate returns on time.

Maybe best of all, keeping your tax records organized may allow you a more restful night of sleep. 

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Disclaimer: The article and information provided here is for informational purposes only and is not intended as a substitute for professional advice.

The post Why proper tax records are important appeared first on Credit Sesame.

Tax deductions and credits can help make filing your taxes in 2023 easier and cheaper, two descriptions not normally associated with income taxes.

You have to know which programs apply to you and must itemize your deductions instead of taking the standard deduction. For most people, itemizing deductions only makes sense if they have enough deductible expenses that add up to more than the savings of a standard deduction.

Tax deductions vs tax credits

First, it helps to know the differences between tax deductions and credits.

Tax deductions

Tax deductions allow a certain amount to be deducted from your taxable income, and can reduce the amount of your income before you calculate the tax you owe. The amount of the tax deduction is subtracted from your income, which lowers your taxable income, and thus your tax bill is lower.

Deductions lower your taxable income by the percentage of your highest federal income tax bracket. If you fall into the 22% tax bracket, a $1,000 deduction saves you $220.

Tax credits

Tax credits reduce the amount of tax you owe on a dollar-for-dollar basis, and can reduce the amount of tax you owe or increase your tax refund. Some credits may give you a refund even if you don’t owe any tax.

A $1,000 tax credit lowers your tax bill by $1,000. Tax credits are usually bigger than tax deductions, and can lower your tax bill by a lot more.

Some credits are refundable, meaning you get a check for the amount, depending on how much you owe in taxes. If you qualify for a $1,000 credit but owe $250 in taxes, you’ll get a refund for the difference of $750. Many credits, however, aren’t refundable.

Popular deductions and credits

The Internal Revenue Service lists many tax deductions and credits that can save taxpayers money. Here are some of the most popular ones:

Child tax credit

The child tax credit provides up to $2,000 per child, with $1,500 potentially refundable. The IRS has an online tool to determine if a persona qualifies for the credit.

Child and dependent care credit

This credit generally covers up to 35% of day care and related costs for a child under 13, a spouse or parent unable to care for themselves, or another dependent so you can work. Expenses are limited to $3,000 for one dependent or $6,000 for two or more.

Earned income tax credit

Called the EITC for short, this tax credit is meant for low-to-moderate-income workers and families. For filers with an adjusted gross income of around $59,000 or less, the EITC provides a tax credit between $560 and $6,935.

Adoption credit

Up to $14,890 in adoption costs per child can be used as a tax credit. An income limit is imposed, up to $263,410 of your modified adjusted gross income for tax year 2022.

American opportunity tax credit

The AOC is an education credit on the first $2,000 spent on tuition, books, equipment and school fees, plus 25% of the next $2,000, for a total of $2,500. Living expenses and transportation costs can’t be claimed.

Lifetime learning credit

This is among the many education tax benefits allowed by the IRS. It allows up to $2,000 paid for tuition and school fees to be used as a tax credit.

Student loan interest deduction

Up to $2,500 can be deducted from taxes on interest paid on student loans.

Charitable donations deduction

Donations you make to charities can be deducted if you itemize. These include cash or property, such as clothes, a car and furniture. You can generally deduct up to 60% of your adjusted gross income. 

Mortgage interest deduction

The mortgage interest tax deduction can be a big savings for homeowners. The mortgage interest they pay is deducted from their taxable income, which lowers their federal income tax.

Saver’s credit

From 10%-50% of up to $2,000, or $4,000 if filing jointly, in contributions to an IRA, 401(k), 403(b) or certain other retirement plans can be taken as a tax credit. The amount of credit you receive is based on the contributions and your adjusted gross income. The lower your income, the higher saver’s credit rate you’ll get.

401(k) contributions deduction

Money moved from your paycheck into a 401(k) retirement plan is not taxed by the IRS. The contribution limit for the 2022 tax year was $20,500, or $27,000 if you were 50 or older.

Electric vehicle tax credit

The electric vehicle tax credit is not refundable, but it can mean deducting from $2,500 to $7,000 from the taxes you owe when buying an electric car. For tax year 2023, the credit expands to used electric vehicles, so consider it when filing your 2023 taxes in 2024.

Solar tax credit

Also called the residential clean energy credit, the solar tax credit gives up to 30% of the installation cost of solar energy systems such as solar water heaters and solar panels.

Health Savings Account contributions deduction

HSA contributions are tax-deductible, and withdrawals for qualified medical expenses are tax-free.

Medical expenses deduction

Qualified, unreimbursed medical and dental expenses that are up to 7.5% of your adjusted gross income can be deducted from your taxes.

Gambling loss deduction

Gambling losses and expenses are tax deductions up to the amount you’ve won gambling. Spend $100 on lottery tickets or bet that much at a casino, then you can report a $100 deduction if you win at least $100. You can’t deduct more than you win.

How much is the standard deduction?

Tax deductions are either itemized or a standard deduction, not both. Itemizing takes some extra work, but is worth it if it’s higher than the standard deduction. 

How much your standard deduction is depends on your filing status. Here are some of the standard deduction amounts for 2022:

• Married for jointly or qualifying widow(er): $25,900
• Head of household: $19,400
• Single or married filing separately: $12,950

Taxpayers who are 65 and older or blind also get an increase in their standard deduction. It’s $1,750 more for single or head of household, and $1,400 more for married or qualifying widow(er).

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Disclaimer: This guide to buying a house and getting a mortgage is for informational purposes only and is not intended as a substitute for professional advice.

The post Tax deductions 101: Common deductions and credits that can save you money appeared first on Credit Sesame.

The tax filing deadline can be a headache just because of the pressure to get your returns in on time. It’s much worse if you find you don’t have the money to pay your taxes.

Don’t panic. Every year, millions of taxpayers are late paying their taxes. It’s a problem, but how big a problem it becomes depends on what you do next.

There are a number of ways to deal with taxes you cannot afford to pay on time. The sooner you take action, the sooner the problem starts to get. The longer you dealym the worse it gets. Here’s our quick guide to dealing with taxes you cannot afford to pay.

File on time
Take out a loan
Get help from the IRS
Plan for tax day 2023

File On Time Even If You Have Taxes You Cannot Afford to Pay

The worst way of dealing with taxes you cannot afford to pay is to try to hide from the problem. That will only make things worse – much worse.

For example, if you file but cannot pay, the penalty for paying your taxes late is 0.5% a month. However, if you don’t file your tax return on time, that penalty jumps to 5% a month. That’s ten times more, just for not not filing.

Those penalties max out at a total of 25% of your unpaid tax debt. However, even once that ceiling is reached you’ll continue to be charged interest on what you owe until you pay it.

The IRS charges interest at a rate of 3% over the Federal Reserve’s short-term rate. This applies to both taxes and penalties owed.

In addition to these immediate costs, failure to file or pay your taxes can affect your eligibility for certain federal programs. Meanwhile, the IRS may attach liens to your property or take other legal action. It also uses private collection agencies to pursue delinquent payments.

If you cannot afford to pay your taxes, the first step is still to file your return.

The next step is to figure out the best way of paying what you owe.

Take Out a Loan to Pay Taxes

So what does the IRS recommend that you do if you cannot afford to pay your taxes?

The IRS advises taxpayers that the best option may be to get a loan. This is because the combination of interest and penalties on unpaid taxes often exceeds the cost of borrowing to pay your tax bill. Here are some possibilities, and the pros and cons of each:

• Home equity loan. This may be easier to get than an unsecured loan, and is a relatively low-cost type of loan. On the downside, you need to be very sure you have the means of repaying the loan because your home will be used as collateral.
• Personal loan. A personal loan doesn’t put your home at risk, and it may be cheaper than credit card debt. However, it may be tough to get a personal loan if you are having financial difficulties, and the worse your credit is, the higher the interest rate you’re likely to pay.
• Credit card debt. If you already have credit available on a credit card, you don’t have to worry about qualifying for a loan. However, credit card interest rates are relatively high, plus you’d have to pay a processing fee on top of any interest charges you incur.
• 401k loan. If you have a balance in a 401k plan, you may be able to borrow against that balance. This depends on the rules of your employer’s plan. While this might seem like a readily accessible source of funds, it does come at a cost. You’d miss out on investment returns until the money is repaid, which could put your retirement saving behind schedule. Also, if you leave your job you might have to repay the loan sooner than expected.

Get Help From The IRS for taxes you cannot afford to pay

If you don’t have the means to pay your taxes and aren’t able to borrow, the IRS offers some other ways to work things out:

• Payment plans. The IRS offers both short-term and long-term payment plans. Short-term plans apply if you can pay in full within 180 days. There’s no fee for setting them up, though late-payment penalties and interest will continue to be assessed on the unpaid balance. Long-term plans are for situations where you need longer to repay. There is a fee for setting these up, but the late-payment penalty rate will be reduced.
• Delayed collection. If you can demonstrate that you’re unable to pay on time, the IRS may agree to temporarily delay collection. Penalties and interest on what you owe will continue to accrue, but at least it will stop active collection efforts.
• Penalty relief. If there’s reasonable cause, such as a family tragedy or unavailability of necessary records, the IRS may agree to reduce or waive some penalties.
• Offer in Compromise. This means the IRS agrees to settle for less than what you owe. You have to be able to show that you lack the financial resources to pay the full amount, and you’ll have to set up a payment schedule to pay what you can. There is a fee for applying for an Offer in Compromise, though it may be waived for low-income taxpayers.

Plan for Tax Day 2023

Once you figure out how to pay the taxes you owe for 2022, the final step is to make sure you don’t get into a similar situation in future. Here are some steps to take:

• Adjust your withholding. Having more taken out of your paycheck will mean you owe less when you file your return.
• Track estimated tax payments against reality. If you make estimated tax payments, compare them to actual earnings throughout the year to make sure your estimates are on track.
• Start an emergency fund. This is a good idea for a variety of reasons, because it cushions you against unexpected financial needs.
• Do your taxes earlier. Waiting till the last minute gives you less time to figure out payment options.

Remember, the IRS has the resources to find tax-payers and collect overdue taxes. It’s likely to be a lot less painful if you work with them to figure out how to deal with overdue taxes rather than making them track you down. You may even be able to reduce your tax bill with a few simple tips.

Disclaimer: The article and information provided here is for informational purposes only and is not intended as a substitute for professional advice.

The post Credit Sesame’s Guide to Dealing with Taxes You Cannot Afford to Pay appeared first on Credit Sesame.

When credit card interest is tax deductible

On any credit card that is used solely for business purposes, the interest is tax deductible. Each purchase must qualify as a business expense under the IRS’s rules. Deduct purchases in the year the purchase is made. Deduct interest in the year you pay it.

When credit card interest isn’t tax deductible.

Credit card interest incurred for personal expenses is not tax deductible. The IRS calls this “personal interest” and offers no tax benefit.

Interest paid on a personal auto loan, on appliances or furniture, on medical procedures and on person-to-person loans is also considered personal interest and is not deductible. Interest paid on a mortgage, however, is deductible. And interest for an auto loan that is strictly for business use is also deductible.

When it gets messy

Like any other expense, if it is partly for business and partly for personal use, credit card interest is deductible in the same proportion as the amount used for business purposes. For example, if you take a loan and use 75 percent of the funds to buy business equipment and 25 percent of the funds to take a family vacation, 75 percent of the interest is deductible. On a credit card, a more common scenario is that a percentage of purchases are business-related and a percentage are personal.

If you use the same credit card for personal and business use, you are legally entitled to deduct the interest paid on business purchases. But a taxpayer who regularly comingles accounts and expenses will have a hard time calculating the correct amount of interest to deduct without fairly advanced math skills. Interest on personal expenses charged to a business card is not tax deductible just by virtue of being on a business card.

More tax deduction tips

Deductible non-business interest. The IRS allows individuals to deduct the interest paid on home loans (mortgages and home equity loans) and student loans. Also, interest paid on money borrowed for the purchase of investment property is tax deductible.

Fees and charges. The annual fee, ATM fees, foreign transaction fees, maintenance fees and many other bank and credit card fees are also tax deductible, so long as the account is used for business purposes.

Other business deductions. Self-employed people can deduct a number of expenses that employed taxpayers cannot, including mileage to and from work-related locations away from the home office, and even a portion of the home’s utility costs.

One final tip. The credit card does not have to be designated a business card by the card issuer in order to qualify as a business account in the eyes of the IRS. The consumer can call any credit card a business card. Keep receipts in case of an audit, and again, use the business card only for business expenses.

Talk to a licensed tax professional about what deductions are appropriate for you.

The post Is Your Credit Card Interest Tax-Deductible? appeared first on Credit Sesame.

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A few new laws are in effect for the 2013 tax year. Don’t get tripped up on them, nor on a few persistently common errors that plague more than a few taxpayers every year.

Making one of these common tax mistakes, no matter how innocently, could result in underpayment of taxes and trigger an onslaught of computer-generated correspondence from the IRS —threatening penalties, liens, imprisonment or other unpleasant action. And if the mistake is in the government’s favor, you could unwittingly forfeit hundreds of dollars or more.

Here are seven common tax mistakes you don’t want to make this year.

1. Fail to keep good records.

Your paperwork is your proof if you ever get audited. Get into the habit of stashing receipts (or better yet, scan them into financial software) and statements. Create an email folder for electronic receipts. They’ll always be sorted by date and you don’t have to print them unless you’re audited. After you file, keep a copy of your tax return and all supporting documentation until the time period for an audit expires. In most cases that’s three years for a federal return and up to five years for a state return. In some cases, your federal return can be audited up to seven years after you file. If you fail to file or file fraudulently, there is no statute of limitations at all.

2. Choose the wrong filing status.

If you’re a single parent, don’t file as “single,” but rather as “head of household.” By doing so, your standard deduction will be higher and, as a result, your taxable income will be lower.

3. Take the standard deduction when you’re better off itemizing.

In general, the higher your income and the greater your assets, the more you will benefit from itemizing. But just because you don’t earn six figures, don’t assume that you should take the standard deduction until you consider all factors. Do a quick check for the most common significant deductions. If you paid mortgage interest, points for refinancing, real estate taxes, significant medical or dental expenses,  state and local taxes (including sales tax) or charitable donations, add them up to see if the total might exceed the standard deduction for which you qualify. If you do itemize, be sure you understand what a legitimate deduction is or get guidance from a tax professional.

4. Ignore strategies that could lower your tax bill.

Be sure you’re taking full advantage of your retirement plan and FSA account, making contributions that lower your taxable income. Also, if you are eligible to contribute to an FSA, you have until April 15^th to make a contribution toward your 2013 limit ($3,250). Don’t ignore medical expenses because you’re intimidated by the 10% threshold (7.5% until 2016 for taxpayers over 65). Acupuncture, smoking cessation programs, dental work and meals and lodging expenses that you incur to get care for you or your dependent are all possible qualifying deductions.

On the flip side of the strategy coin, beware of overusing certain tax benefits. For example, if you participated in a dependent care flexible spending plan, you can’t claim a full dependent care tax credit. That would be taking two tax breaks for the same expense.

5. Overstate charitable gifts.

Gifts of $250 or more must be acknowledged in writing, and the letter from the charity must state whether anything of value was received in exchange for the gift. It there was, its value must be deducted from the gift amount before you claim the deduction. Gifts of property worth more than $5,000 require a qualified appraisal.

6. Neglect to report income.

The IRS receives documentation of your income from every source that sends you a statement or tax form, and their computers cross check those figures against the amounts you include on your return. If the numbers don’t add up, it’s a sure-fire red flag.

7. Forget to sign your return or neglect to include payment if you owe.

A surprising number of taxpayers forget to sign their return. This mistake is equivalent to not filing a return at all, so if you’re filing close to or on the deadline, that missing signature could cost you significant penalties and fees. One way to avoid making this mistake is to file electronically. Even if you get help from a tax pro, be sure to double check the return and all enclosures.

The post 7 Common Tax Mistakes You Don’t Want to Make appeared first on Credit Sesame.