by Carolyn Lieberman

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Record keeping is a challenge   for many of us, especially given the complexity of modern life. So what matters, why, and how can we be better-prepared for income taxes this year and in the future? First and foremost, start a tax file now, if you haven’t already. Whether you create a system with folders for each category or designate a large envelope for tax-related documents, life will be much easier at tax time. Start one file to collect 2009 data and another for 2010 that you can add to throughout the year, and capture all documents relating to income, itemizable deductions and business expenses.

For individual returns, that includes W-2s and 1099s, and documents relating to home, educational, health care and automobile expenses. The envelopes containing  W-2s and 1099s are usually conveniently emblazoned “Important Tax Information.” Throughout the year you can also be filing any documents relating to stock sales or purchases, and any changes to retirement plans.

Your home is possibly your biggest source of deductions. In addition to property tax bills and mortgage interest statements, keep receipts for energy-saving improvements and equipment purchased, as these qualify for tax credits through 2016. If you purchased a home in 2009, you may be able to claim a homebuyer’s credit; copies of your closing papers will be another item to add to the tax-time file.

You’ll also want to keep receipts for medical and dental expenses –   including insurance premiums – as well as childcare, tuition paid, and any unreimbursed employee expenses. The latter might include use of your personal vehicle for work, so keep a mileage log – a simple journal of trips taken, their length and purpose. If you bought a new vehicle this year, keep your purchase documents handy – the sales tax is deductible.

For businesses, if you have work and storage space at home, keep receipts for insurance, utilities, repairs, housekeeping, and other maintenance. A portion of those costs may be deductible as business expenses. You’ll need to track auto expenses — such as auto registration and repair bills — and keep mileage logs as well. Documenting mileage  is now oh-so-easy thanks to Internet-based maps; making the mileage part of your calendar entry keeps it simple. If you opt to use the meal and lodging allowances rather than keeping receipts for travel and entertainment, your calendar and notes about meetings and attendees are even more important.

Computer-based calendars and their expense and mileage tracking features are great, but it is wise to print out your calendars and expense and mileage reports weekly. Technology, and especially synching among multiple devices and platforms, can go haywire and delete important data. Further, the IRS can require paper copies of anything, so plan    accordingly. If you decide to rely on digital storage and print only as needed, be sure your records are backed up on separate media.

For businesses, capturing income and expenses accurately is critical. And it’s imperative to keep receipts. A separate bank account for your business — even if there is no separate entity in the form of a corporation or a “doing business as” name — makes things much easier from a bookkeeping standpoint. A $10-12 service charge per month, depending on your bank and account structure, is well worth the ease of accounting for your business income and expenses. An extra $2 or $3 each month to get images of your cancelled checks with your statement is also worthwhile; a single copy later can  cost as much as $2.

Wishing you many happy returns!

Carolyn Lieberman is the office manager at BayCPAs. BayCPAs’ practitioners — Daniel R. Miller, JD, CPA, and Deborah Marion, CPA, EA — have over 50 years experience between them. You can reach BayCPAs at 650-726-7632, or toll-free at   877-526-8776.