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ARE YOU SERIOUS ABOUT paying less in taxes? I mean, really serious? Believe it or not, you are in control of how much you pay to Uncle Sam, your state, your property tax assessor, city taxes, sales taxes, and all taxes. Look at it this way: you have three choices when it comes to taxes.

You can be a Tax Pushover, coasting along and paying out everything that’s demanded of you without another thought. You can be a Tax Vigilante, fighting passionately to eliminate or reduce taxes wherever you can. Or you can be Tax Aware, doing the fundamental, logical things needed to keep your taxes legally low without becoming obsessed. This book will provide you with the information you need to fulfill any of those options. You’ll get some routine ideas, but you will find special gems not found anywhere else. They are legal, but most people have never thought about using these strategies and tips.

Tip #1:

The foundation for all tax reporting is good record keeping. The concept is the same whether you’re in business or simply dealing with your personal tax situation. In this book, we will focus on your personal records. It’s not as hard to do as you think—especially with all the nifty apps available to you. We will talk more about apps in a few minutes.

We won’t go into detail on the various apps—that would require a whole other book. The tips that follow provide you with the names and URLs of the top apps that can help make your lives easier. Some are free. Some charge a fee.

Tip #2:

One of the big secrets to getting the best tax benefits is having complete records of all your financial transactions. That way, even if you didn’t know about a tax break in your favor, you can take advantage of it at tax time because you have the records to prove you spend the money, drove the miles, or took the appropriate action.

Tip #3:

Everyone should know at least a little bit about the household records. I often find that when it comes to married couples, only one person seems to handle all the household finances. It’s important for both to be involved and to know where all the files and records are located. After all, heaven forbid, if you should become divorced or widowed, it’s important to know how to take over and manage the household finances, pay bills, get organized for taxes, and so on. These events generally happen suddenly—with no warning at all. I have seen too many people in these situations become paralyzed and unable to manage. As a result, they stop filing tax returns and get into financial and credit trouble for five years or more. Please avoid that, OK? To learn a little bit about bookkeeping, painlessly—and perhaps for free—see the following:

 The Bean Counter: http://www.dwmbeancounter.com

 The Bookkeeping Master: https://www.youtube.com/watch?v=IhYJbCAcCKE

Tip #4:

Income requirements. Here’s the information you must store in your records in order to satisfy the dreaded IRS when it comes to income (as it applies to your particular financial situation). We’ll discuss many of these in the chapters to come:

 • Paystubs—especially the final, year-to-date paystub at the end of the year (just in case you don’t end up getting a W-2) or at the end of a job if you leave during the year.

 • W-2s, 1099s, 1098s, K-1s, and all other third-party notifications.

 • Bank and brokerage statements. Keep a paper or electronic copy of each statement for each and every bank account. That includes PayPal, Itex, Bitcoin, and all other online accounts—including investment accounts.

 • Securities trades—sales, purchases, short sales, straddles, and so on. You are the best source of information about the basis of your securities.

 • Business income. Do not rely on 1099-MISCs. It’s is your responsibility to keep your own books when you have a business. Just make sure the total of the 1099s you receive is less than or equal to the business income you report.

 • Distributions from partnerships.

 • Alimony, unemployment, state refunds, disability, and other miscellaneous sources—often forgotten, but generally taxable.

 • Rental income—on your commercial or residential real estate, or your own home, or rooms in your home via private or commercial sources or places like AirBnB.

 • Retirement income—Social Security, IRA and retirement account withdrawals.

 • Sales of assets. Not all sales are taxable, but all must be reported.

 • Awards, prizes, scholarships—surprise, surprise, surprise. Not only are these things often taxable, but when children receive them, they might be subject to kiddie tax (tax at the parents’ highest tax bracket).

 • Gambling income. Even if you lost the W-2G the casino or gambling establishment gave you, the IRS has a copy of it.

 • Barter income—whether through formal clubs or informal barter. Some of the transactions might be taxable. And some of the reported transactions might have deductible offsets.

 • Inheritances and gifts. Often there is no taxable income until the assets you receive are sold or cashed out, but there may be some reporting required.

 • Hobby income. Sources could be eBay, ePage, Etsy, or other hobby income sites. There are special rules for reporting hobby income and deductions. You’re going to hate these particular rules.

 • Cancelled debt—on credit cards, real estate, and personal debt. I hate to tell you, but this invisible income is taxable.

 • Jury pay. It’s not much. And you often return it to your employer, but . . . remember to enter it because the IRS knows.

Tip #5:

Expense requirements. Here’s the information you must store in your records in order to satisfy the dreaded IRS when it comes to expenses (as it applies to your particular financial situation):

 • Keep copies of all your cancelled checks—even if it’s only a PDF copy.

 • If you pay cash for something major, get a receipt and scan it into your online filing system or file it into your paper file.

 • If you pay cash for something minor like parking, valet, tips, and so on, keep a small pad of paper handy (or 1" × 1" Post-it). Write the date, time, location, and amount on a separate page for each instance. File it or scan it by the end of each day.

 • When it comes to charity, never pay cash. Always use a check, credit card, or online payment (like PayPal). Get a formal receipt for all donations of $250 or more. (More detail later in Chapter 10: Charity Deductions Begin at Home.)

 • Credit card statements are not enough to prove what you bought if you want to deduct it. You need the receipt as well. For big-ticket items, be sure to keep the receipts. (Besides, it helps for returns and warranties.)

 • Save your property tax and vehicle registration bills with all the details they show. It doesn’t hurt to copy the check or electronic payment and keep it with those receipts.

 • Make a copy of every estimated tax payment you make for the IRS, state, or local taxes. Be sure to show the form number, year (or quarter), and type of tax you have just paid.

 • Keep mileage logs for all driving so you can later deduct medical, charity, volunteer, moving, and/or business miles.

 • When it comes to home improvements, always keep copies of all the invoices and proofs of payment. The details may come in handy for tax credits, warranties, or reducing profits when you sell the property.

 • If you get tips on your job, keep the details about the tips you get and those you share with other workers at your job.

 • For more details on how to keep records, read chapter 1 of IRS Publication 17—Your Federal Income Tax (https://www.irs.gov/publications/p17/pt01.html).

How long should you keep records? This is one of the most common questions people ask TaxMama.

Tip #6:

You don’t need to keep everything forever . . . but do keep tax returns forever. People are often shocked when the IRS or state pops up saying a tax return has never been filed for a given year, five or ten years ago. Without a copy of that tax return, it’s nearly impossible to prove that you did file. They don’t take up much space. You can even scan them (preferably as PDF files), as long as you are certain that the copies are clean, readable, and retrievable a decade from now. Do you need all the backup records that went with the tax return? Not necessarily. But keep those for at least six to seven years.

Tip #7:

The IRS is generally only permitted to audit for up to three years after you file a tax return. However, if you have underreported gross income, overreported expenses, or have overstated the basis of assets by 25 percent or more, the IRS has the right to audit for up to six years. If there are criminal omissions or overstatements, the IRS may audit forever. But that should not apply to you. Add one to two years for state deadlines.

What about other records?

Tip #8:

Keep the following records until at least six years after the contracts or terms expire or assets are sold:

 • Copies of all contracts, warranties, original insurance contracts, and loans. You will need these to ensure that the terms are met in the event you need to file a claim or a dispute. The (annual) invoices aren’t enough. The original contracts contain the terms.

 • Purchase documents for real estate, and all improvements to the real estate. These will help you when you sell the property—or if you want to convert it to a rental.

 • Copies of the original property’s purchase and sale, and the tax return reporting of the rollover if you ever rolled over gains—in either tax-free exchanges or the sale of a home—before 1998. (If you don’t have the records, start digging.)

 • Purchase information and all splits of all stocks or securities that you are still holding (or sold this year). If you reinvested dividends, don’t forget to add those reinvestments to the cost. If you don’t have all the details, but know approximately when you originally bought the stock, www.netbasis.com can reconstruct the entire history of your ownership and compute your basis for a small fee.

 • Deductions for funding a regular Individual Retirement Account (IRA). Sometimes, though, you make after-tax contributions. Be sure to track those, since those funds won’t be taxable when you withdraw your money. Also, states may have a different allowable IRA deduction. So you might have a tax basis for the state. (More details in Chapter 11.)

Tip #9:

Keep tax preparation records for at least six years. That means all the cancelled checks, receipts, and records that were directly used in the preparation of your tax return. This should include copies of all your notes, work papers, and correspondence with your tax professional or tax software company. Keep them with a copy of the tax return, so if you’re ever audited, everything is right there, right at hand.

TaxMama’s Recordkeeping Law of the Universe:

You won’t need to look at most of your records for years. But as soon as you throw something out—you will need it desperately.

Tip #10:

The benefits of mobile applications:

 • They let you scan documents, checks, and receipts on the spot and let you upload them to your application instantly instead of spending your entire evening tediously entering data into a traditional print or electronic system. Yawn.

 • They generally integrate with other tools to help you organize the data—or to have someone else organize the data for you (like Shoeboxed.com).

 • The information can be stored in the Cloud, so you don’t need to worry about losing the data, fires, messy desks, and so on.

 • When the documents are linked to specific lines in your books and records, you are creating an “audit trail.” That means if the IRS or state wants to see the receipt for a particular deduction (or category of deductions), you can just click and give it to them or print out the all the data in the category.

 • Some of them will use GPS to track your mileage for each driving incident, allowing you to categorize the trip as personal, business, medical, moving, or charitable mileage. Others will require manual entries for each trip.

Tip #11:

The drawbacks of mobile applications:

 • A warning about free apps—read the contract information carefully. You will learn that you generally don’t own your data. They can shut down the app at any time. Think about this: If they aren’t getting paid, how can they afford to keep providing your free service? What are they selling to get the funds to keep their doors open? Are they selling your data to advertisers? Is there a paid upgrade? What about the security of your private information, especially when you link these free apps to your bank accounts and brokerage accounts? Do they have access to your financial usernames and passwords? Who owns and/or creates the apps? Do they have deep pockets to compensate you or help you in the event of identity theft?

 • Security—Some of the data are often also stored on your mobile device. You don’t generally have it password protected when you use it all day. So the data are at risk. If your device is lost or stolen, you must scramble to change all the passwords on all your accounts immediately.

Tip #12:

These are some of the top applications available to you for recordkeeping and mileage (listed in alphabetical order, not by preference):

 DeductR: http://deductr.com

 Expensify: https://www.expensify.com

 FreshBooks: http://www.freshbooks.com

 MetroMile’s mileage app: https://www.metromile.com/technology

Tip #13:

These are some of the top personal recordkeeping systems that provide full bookkeeping (listed in alphabetical order, not by preference). Many apps are designed to integrate with these systems:

 Mint: https://www.mint.com

 Outright: http://outright.com

 QuickBooks: http://www.quickbooks.com/App

 Quicken: http://www.quicken.com/stay-connected-your-money

 Shoeboxed: https://www.shoeboxed.com

Note: Of course you can use Excel if you know how. But if you don’t already know how to use Excel, an app might be a better choice.

Tip #14:

Not everyone lives in the Cloud. Some people still like the feel, texture, and smell of good, old fashioned paper. Here are some paper alternatives for folks who still like the tangible feel of paper records:

 Tax MiniMiser is a system with sets of monthly envelopes to hold all your receipts, invoices, and documents—and where you can record all money you receive and money that you spend. Of all the paper systems, the Tax MiniMiser is the newest one, designed right around the turn of this century (2000) by Bob Whitaker after he got tired of being audited repeatedly. (All the other systems have been used for fifty to one hundred years or more.) http://taxminimiser.com.

 Dome Record Books have books for a variety of industries that include bookkeeping information, bank reconciliations, payroll record, or whatever you need. http://www.domeproductsonline.com/dome-books.

 Wilson Jones has been producing columnar pads and binders in many shapes and sizes since 1893. You can design your own journals and ledgers based on the information you need to track. Pair these pads with loose-leaf notebooks and a set of tabs, and voila! You have your own customized accounting system. http://www.wilsonjones.com/wj/us/us/s/2252/accounting-suppliesaspx.

 SafeGuard One-Write Systems combines ledger sheets with carbon-backed checks and receipts. So each time you write a check or make a sale, the entry appears on your ledgers without having to copy it over. This is how I first learned bookkeeping and how to reconcile books. https://www.gosafeguard.com/business.

 Accordion files can be paired with colorful labels, allowing you to customize your own filing system. Get a file with 24–31 pockets to store your receipts, invoices, and so on. Use a set with 12 pockets to store bank and brokerage statements. Or use the 12 pockets as a tickler file to remind you about monthly bills to pay, things to do, appointments or deadlines, or even birthdays and special occasions.