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 just 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.
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:
- 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.
- 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.
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.
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 Account Lancer 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.
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 your 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.