Toss This. Not That.

Post tax filing record retention


With a sigh you are relieved that yet another tax return has been sent off to the government. Another 12 months before you need to do this again. But before you close that tax file, there is still some work to do. If the IRS or state revenue department selects your return for review, you will need to be prepared. Here is what you need to know:

Record Keeping Tips

  1. Normally three years. Normally tax records should be kept for three years from the later of the tax filing due date, the date you filed your taxes, or the date you paid your tax in full.
  2. Some documents should be saved indefinitely. This includes things like:
    • Your tax return
    • Records related to a home purchase or sale
    • Stock transactions
    • Business/Rental records
  3. The IRS does not require any special record keeping system. You just need to keep all documents that can support information on your tax return.
  4. Here are common records worth retaining:
    • Canceled checks
    • Invoices
    • Other proof of payment for claimed deductions
    • Bank and credit card statements
    • Mileage logs
    • Receipts with time; place; and purpose noted
  5. Be mindful of other record retention requirements
    • State record retention requirements are often 6 months to 1 year longer than Federal requirements
    • Social Security records often need to be proofed to ensure they match your pay stubs
    • Insurance, banking, and estate management may require other records
    • Federal retention requirements become 6 years if your return understates your tax obligation by more than 25%, and the record retention period is indefinite if fraud is involved.

Keep a good system

So the build up of paperwork does not overwhelm your attic, at the end of the tax year rotate your records. Decide how many years of records must be retained. Then count back from your current tax return filing year and shred unneeded, older documentation. Create new empty files for the current tax year to save receipts for the coming year. Consider scanning records to keep digital copies. A final word of caution. If you are unsure whether to retain or shred, keep it unless you know the document can be replaced.

Time to Think About Commuting

Don’t leave this benefit on the table


$3.40 to $4.00 per gallon gas prices are quickly becoming the new norm. Congress and the President appear to be doing very little to control this inflationary cost. What can you do? Thankfully there are commuting benefits that can lower your cost of getting to and from work during 2013.

Transit Passes: up to $245/ month
Van Pooling: up to $245/month
Parking Allowance: up to $245/month
Bicycle Commuting: up to $20/month

How it works

Your employer can provide you the benefits listed above and you do not have to report the benefit on your income tax return. Because the benefit does not hit your W-2, you pay no federal tax, no state tax, no Social Security or Medicare.

Some tips

  • Transit AND parking. Transit passes are good for the train, subway and bus systems and can be used in addition to parking passes. So you can park at the train station, receive a parking allowance AND receive the transit pass benefit.
  • Employer-provided. Remember these benefits are employer-provided benefits. Check with human resources to see if your employer provides these benefits.
  • The salary-reduction alternative. If your employer does not provide these benefits they might allow you to reduce your take-home pay instead. If allowed by your employer, you set aside money from your wages to pay for the passes or parking allowance. This salary-reduction would then allow you to pay for your commuting costs up to the limits in pre-tax dollars. You may not use this method to pay for bicycle commuting.
  • Bicycle commuting only. You may use the $20/ month benefit to help pay for the repair and maintenance on your bike, however you may not receive this benefit in any month that you also receive other transit benefits.

Many employees are unaware that their employer provides a transit benefit, so check it out. Even if they do not, perhaps they’ll consider creating a salary-reduction alternative instead.

Audit Target: The Sole Proprietor


Each year the IRS publishes their activities in a publication called the Data Book. And each year for the past number of years the number one target of audits are those tax returns with a Schedule C for small business activity. So how to prepare yourself for a possible audit? Here are some tips.

  • Keep records separate. The quickest way to get a deduction for your business disallowed is to blend your personal bills with those from your business. Open a separate checking account and use a separate credit card for business expenses.
  • Keep logs. Keep a logbook for business miles. Keep receipts for business meetings and meals. Include the date, time, subject, and who was present at the meeting.
  • Ordinary and necessary. Two key words to use to qualify legitimate, deductible business expenses per the IRS are;
    • Ordinary: an expense that is common and accepted in your industry.
    • Necessary: an expense that is helpful and appropriate for your business.
  • Business not hobby. A qualified business activity allows for direct deductibility of appropriate expenses, where-as hobby activity expenses are only allowed as a miscellaneous itemized deduction subject to passing a 2% adjusted gross income threshold. There are many facets here, but key among them is a profit motive and active participation in the activity to qualify your activity as a business.

Just because the IRS focuses their audit activities in this area does not mean you should be reluctant to take appropriate deductions. Just be prepared to defend your position with excellent records.

Are You Maximizing Your Retirement Account Tax Benefit?

2013 contribution limits increase for most major retirement plans


2013 marks a watershed year for contribution limit increases in many of the core retirement savings programs. Many of these contribution limit increases are established using a federal formula. While most annual limits stayed the same from 2011 to 2012, this is not the case for 2013. Here are current annual contribution limits for the more popular programs:

Current Year
Last Year
Change Age 50 or over
to catch up
IRA: Traditional $5,500 $5,000 +$500 add: $1,000
IRA: Roth $5,500 $5,000 +$500 add: $1,000
IRA: Simple $12,000 $11,500 +$500 add: $2,500
401(k), 403(b), 457 plans $17,500 $17,000 +$500 add: $5,500

Take action

If you have not already done so, please consider:

  • reviewing and adjusting your periodic contributions to your retirement savings accounts to take advantage of the higher limits
  • setting up new accounts for a spouse or dependent
  • using this change as a chance to review the status of your retirement plan
  • reviewing contributions to other tax-advantaged plans like Flexible Spending Accounts (health care and dependent care) and pre-paid medical savings plans like HSAs (Health Savings Accounts)

Triple Tax: aka The Lottery

Most everyone enjoys dreaming of winning it big in the lottery. News media outlets publicize the large unclaimed pots of money on the evening news and they put a spotlight on the lucky multi-million dollar winners. Ever wonder what the tax math looks like?

The Lottery Wage Drain

The bottom line when seen from a wage stand point is that 75% or more of the income used to play the lottery does not end up in the hands of the winner.