A better tax season starts with good records
Year-round tax planning is for everyone. An important part of that is record-keeping. Gathering tax documents throughout the year and having an organized recordkeeping system can make it easier when it comes to filing a tax return or understanding a letter from the IRS, especially when you have multiple sources of income over the year or many business expenses, as most freelancers do
Good records help:
- Identify sources of income. You may receive money or property from a variety of sources. The records can identify the sources of income and help separate business from nonbusiness income and taxable from nontaxable income. Keeping track of your income over the year will also help you more accurately calculate your quarterly estimated tax payments.
- Keep track of expenses. You can use records to identify expenses for which you can claim a deduction. This will help you determine whether to itemize deductions at filing (and save you the last-minute scrape through a year's worth of bank statements on April 14th). It may also help you discover potentially overlooked deductions or credits.
- Prepare tax returns. Good records help you file your tax return quickly and accurately. Throughout the year, you should add tax records to a file as you receive them to make preparing a tax return easier.
- Support items reported on tax returns. Well-organized records make it easier to prepare a tax return and help provide answers if the return is selected for examination or if you receive an IRS notice.
In general, the IRS suggests that taxpayers keep records for three years from the date they filed the tax return. Taxpayers should develop a system that keeps all their important information together, like a software program for electronic recordkeeping or storing paper documents in labeled folders.
Records to keep:
- Tax-related records. This includes wage and earning statements from all employers or payers, interest and dividend statements from banks, certain government payments like unemployment compensation, other income documents and records of virtual currency transactions. You should also keep receipts, canceled checks, and other documents – electronic or paper - that support income, a deduction, or a credit reported on you tax return.
- IRS letters, notices and prior year tax returns. You should keep copies of prior year tax returns and notices or letters you receive from the IRS. These include adjustment notices when an action is taken on the taxpayer's account, Economic Impact Payment notices, and letters about advance payments of the 2021 child tax credit. If you receive 2021 advance child tax credit payments, you will be sent a letter early next year that provides the amount of payments they received in 2021. You can refer to this letter when filing your 2021 tax return in 2022.
- Property records. You should also keep records relating to property they dispose of or sell. These records are needed to figure their basis for computing gain or loss.
- Business income and expenses. The IRS doesn't care what system you use for keeping track of your freelance business - as long as you have a method that clearly and accurately reflects your gross income and expenses. If you have employees, you must keep all employment tax records for at least four years after the tax is due or paid, whichever is later.
- Health insurance. You should keep records of your own and your family members' health care insurance coverage. If you are claiming the premium tax credit, you'll need to have information about any advance credit payments received through the Health Insurance Marketplace and the premiums you paid.