Do you know what important documents to keep and why? You risk wasting money and time if you don’t back up your income tax records.
Millions of Americans will remember to do their taxes juuust in time to sprint to the April 15 finish, fists stuffed with W2s and receipts. But if you’re a homeowner, wrangling income tax paperwork — or other home records — is a marathon, not a sprint. Even more than repainting your house’s facade or mowing your lawn, keeping important docs organized year round is a crucial part of home maintenance — it can save you $ and protect you from the Tax Man.
Here’s what could happen if you don’t keep accurate records and back them up.
1. You’ll Pay More Taxes Than You Should
Homeowners get access to various deductions and credits based on payments for owning, financing, and maintaining a home. If you don’t maintain your records, you may miss out on some of these major tax benefits:
1. Real Estate Tax and Mortgage Interest Deductions. ”A homeowner’s biggest tax break generally comes from his or their monthly mortgage payments since, for most folks, the bulk of that check goes toward interest, and all that interest is fully deductible on Schedule A,” says Kay Bell, tax analyst at Bankrate.com. Property taxes are also deductible.
What You Need: Your annual statement from your mortgage company, which usually includes property taxes. If you pay your real estate taxes directly, the bill from your local unit of government.
2. Home Improvement Deductions: Improvements made for purpose of accommodating disabled residents can be included in medical expense deductions. Energy costs for certain medical-related improvements may also be partially deductible.
What You Need: Receipts and a letter from a doctor.
3. Tax Credits for Energy-Efficient Upgrades: Installing new energy-efficient systems (that meet Energy Star guidelines) like insulation, a roof, windows, water heater, or furnace can earn you a credit to offset your tax liability.
What You Need: Receipts and certification from product manufacturers.
4. Home Office Deductions: If you can deduct the costs of a home office , you will need to prove you paid those expenses. For example, if your home office takes up 10% of your home’s square footage, you can deduct 10% of your home insurance and utility costs. But you need proof you paid those bills.
What You Need: Bank statements, bill receipts, insurance receipts, your mortgage documents, and any other documents of related expenses. If you’re self-employed, you’ll be taking this deduction on Schedule C.
2. You May Have Trouble Selling Your Home
It’s not just the IRS that requires paperwork. Ryan Fitzgerald, a REALTOR® in Raleigh, N.C., and owner of Raleigh Realty, recently ran into proof of ownership issues when a seller hadn’t backed up his paperwork, nearly causing a delay in the sale of his property.
“The original deed was filed with the wrong county in North Carolina. The original bank was sold to another bank, and there were several refinances in between that caused confusion as well. The original paperwork could not be located by the purchasing bank, and since the original bank was no longer in business, the seller was freaking out about the sale not being able to go through,” recalls Fitzgerald.
“The buyer’s attorney needed to prove that my seller did indeed own the property outright, and could not do so without the original deed,” he says. “This all could have been avoided if there were duplicate documents backed up.”
What You Need: Your home’s deed, or deed of trust if you have a mortgage that needs to be paid off.
3. You’ll Miss Some Tax Savings When You Sell
In addition to all the tax benefits and credits homeowners can claim when they maintain proper paper trails, Eric Nisall, tax pro and AccountLancer founder, reminds homeowners, “It’s important to keep receipts and detailed records” even on home improvements and repairs that are not tax deductible. Those non-deductible expenses could offset potential taxes on the sale of your home.
Any gain on the sale of a primary residence over $250,000, or $500,000 for married couples filing jointly, is taxable. “When it comes time to sell your home, those expenses can be used to increase the basis in the home,” says Nisall. “Adding the costs of improvements to the original purchase price increases the basis, which in turn can reduce the taxable gain on the eventual sale,” he adds.
What You Need: All receipts from major home improvements.
4. You Could Be Fined By the IRS
By now you’ve probably got this figured out: keep the damn paperwork! But it’s not just about missing out on tax deductions — it also protects you if the IRS comes knocking. Because if they do, and you don’t have the paperwork to back up your deductions, you could be fined penalties and interest! The IRS expects to see proof of payment for all expenses.
What You Need: All tax and expense records stored and securely backed up. Put all your paperwork with a copy of your tax return. Make at least one hard copy. A digital backup on a drive or a secure server in the cloud is a good idea, too. Digital copies are often fine with the IRS, but they have the right to demand a hard copy. So be sure to put one physical copy in a safety deposit box or some other secure place that will protect against fire, flood, theft, etc.
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