John Ulzheimer for Credit Card Insider writes: As 2014’s W2 forms, 1099 forms, and other tax related documents find
their way into our mailboxes it can only signify one thing, which is
that tax season is upon us. Most taxpayers who’ve begun the process of
gathering tax documents generally have two similar concerns.
First, taxpayers want their tax returns prepared so that they
can receive the largest refund possible, or so they will owe the least
amount possible. Second, taxpayers want to make the process of preparing their tax returns to be as simple as it can possibly be.
Deductions 101
When a taxpayer claims an eligible deduction on his tax return the
effect is a subtraction from his total taxable income for the year and,
therefore, his overall tax liability is lowered. In layman’s terms a
deduction signifies that a taxpayer owes the government less money and,
for many taxpayers, may be entitled to a refund or credit of any overage
of taxes paid.
However, in order to properly claim a deduction on a tax return the
taxpayer needs to maintain adequate proof of the deduction in case the
IRS wishes to verify its eligibility in an audit at a later date.
Proving Deductions: Credit Card Statements VS Receipts
As mentioned above, in order to properly claim a deduction a taxpayer
is required to maintain documents which support his claim (i.e.
receipts, credit card statements, bank statements, canceled checks,
etc.) Unsurprisingly, when tax preparation season rolls around most
taxpayers would prefer to use credit card statements to prepare their
tax returns instead of receipts. It’s just easier.
Credit card statements are organized, concise, streamlined, and easy
to read. Conversely, it can take hours of tedious preparation to comb
through a mountain of unorganized receipts in order to uncover potential
deductions, and that’s assuming the taxpayer has even held on to said
receipts and they are not covered in ketchup and sitting in the bottom
of a trash bag at the county landfill.
Each year, when faced with the personal mountain of unorganized
receipts, many taxpayers will let out a frustrated sigh and pose the
question “Can I just use my credit card statements for tax preparation instead?”
The answer to this question of frustration is “both yes and no.”
Credit card statements can absolutely be used to assist with tax
return preparation and, when used properly, these statements have the
ability to help taxpayers save a lot of time. Yet it is also important
to keep in mind that the IRS requires receipts to back up many
deduction claims in the event of an audit.
The reason that receipts are so important to the IRS is due to the
fact that while a credit card statement will demonstrate how much a
taxpayer spent on a particular transaction, it will not detail what was purchased.
For example, a credit card statement might show that a $2,000
transaction was made at SAM’s Club. However, the statement would not
prove that the $2,000 transaction was made to purchase computer
equipment for a taxpayer’s business. From the standpoint of the IRS, the
$2,000 could just have easily been spent on a new big screen TV for the
taxpayer’s Super Bowl party which, unfortunately for NFL fans, is not
an approved deduction.
While a credit card statement can certainly be useful to organize and
manage your purchase history, only a receipt can truly defend a
taxpayer’s claimed deductions in the event of an audit.
How Long Should Statements Be Kept?
Even after a tax return has been completed it is still important for
taxpayers to hang onto receipts and credit card statements because the IRS can audit a taxpayer’s return for up to 3 years from the date it was filed.
However, even though the IRS may only be able to audit a taxpayer for
3 years in most cases the taxpayer will still need to keep his receipts
and statements for a while longer than that. According to the FDIC, credit card statements without tax significance should be held onto for about 12 months. However, credit card statements that do have tax significance should be held onto for 7 years.
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