Paying federal and state income taxes isn't anybody's idea of a fun time, but it’s your duty to pay your taxes and file your tax return. If you're someone who itemizes deductions, you’ll need to provide proof of deductions in the form of receipts.
At CMP, we help our clients with their taxes, ensuring they get all available tax deductions and have the receipts to back them up. With that in mind, here's our guide to which receipts to keep for your income tax returns.
Do You Need Receipts for Taxes?
Receipts represent proof of payment for an item or service. If you’ve never itemized deductions, you might imagine that you need to attach receipts to your tax forms. In fact, that's not the case, but you should keep receipts for any personal or business transactions related to the deductions you take.
You must keep receipts because you'll need them if you’re the subject of an Internal Revenue Service audit. You should have paperwork to prove that any deductions you took were legitimate.
Both individuals and business owners should keep receipts. Many business activities are tax-deductible, including meals for clients and office equipment and supplies purchases. Having receipts on hand will minimize the risk that you'll take a deduction you can't back up and make an audit far less stressful than it could be without receipts.
What Receipts Should I Keep for Personal Taxes?
Before you destroy any tax records you might need to show the IRS, let's review the receipts you should keep for tax purposes.
Keep in mind that if you take only the standard deduction, you don’t need to worry about keeping receipts for the IRS. This advice applies only if you have deductible expenses. We recommend that if you itemize deductions, you should sort receipts by category. Some categories you group your receipts in could include the following.
Medical Expenses
If you have deductible medical expenses, you can save money when tax time comes around. A qualified medical deduction can include expenses paid for you, your spouse or domestic partner, your dependents, and your children, provided you didn’t claim them as dependents due to a separation or divorce agreement.
Here are the medical expenses you may deduct and therefore, need receipts as proof of payment.
- Insurance premiums for medical, dental, vision, long-term care, and Medicare Part B or Part D insurance that weren’t paid using pre-tax dollars.
- Co-payments for medical, dental, or vision care, including office visits and prescriptions.
- The cost of medical equipment, including eyeglasses and contact lenses, prescription drugs, crutches, hearing aids, braces, wheelchairs, breast pumps, oxygen tanks and compressors, and lactation aids, plus any costs associated with a trained guide dog.
- Medical exam or test fees.
- Alternative healthcare, including expenses for acupuncture, chiropractic services, mental health treatment with a psychologist or psychiatrist, podiatry, physical or occupational therapy, and any other therapy you receive as a medical treatment.
- Hospital stays, nursing care, smoking cessation programs, and weight loss programs prescribed by a doctor.
- Transportation expenses associated with trips to and from any of the above medical professionals, including tolls, parking fees, mileage, transportation via ambulance, and expenses related to overnight hotel stays if you receive treatment out of town.
If you keep medical receipts, tax deductions will be easy to make and can minimize your financial burden if you've spent a lot on medical treatments. Hopefully, you have an HSA to help minimize your medical expenses liability.
Tax Receipt for Donation
Donations you make to qualified charitable organizations and nonprofits may be eligible for a tax deduction. You should request and maintain receipts for all donations.
As a reminder, only donations made to 501(c)(3) nonprofits are tax deductible. You must have donated without getting anything in return. In most cases, you may donate up to 50% of your adjusted gross income.
Childcare Expenses
Some dependent care expenses may qualify for a tax credit, including money paid to a daycare provider, babysitter, after-school program, or day camp. You may qualify for a credit if childcare is provided in your home, with additional expenses such as the cost of a cook, house cleaner, or housekeeper who cares for your child or dependent while providing other services.
The IRS will allow you to claim the credit only if you paid someone to allow you or your spouse to work or find work. You may be eligible if both you and your spouse have earned income. The only exceptions are if your spouse is either a full-time student or disabled.
There are two qualifications for dependents under this rule. If you have a child under 13 whom you claim as a dependent, a disabled dependent, or a spouse who is unable to care for themselves, you can claim the credit. If you do claim the credit, be sure to keep all receipts associated with childcare or dependent care.
Receipts for Large Personal Purchases
In most cases, you can deduct your state and local income taxes when you file your federal tax return. However, if you have made a large purchase during the year, there’s an alternative.
If you bought a boat, RV, or some other large item where the sales tax was higher than your state and local income tax, you have the option of deducting your sales tax instead when you file your federal tax return. If you choose to exercise this option, you must keep the receipt as proof that you paid the sales tax in question. There’s a cap of $10,000 on this amount.
Should I Keep Grocery Receipts for Taxes?
You may accumulate a large number of receipts and wonder whether you need to keep some of them. Grocery receipts are an example. Do you need to hold onto them? The short answer is that there are some circumstances when you might need grocery receipts to file your taxes.
- You own a food business. If you own a restaurant, catering company, bakery, or any other type of business that makes, serves, or sells food, then you’ll need to hang on to grocery receipts to substantiate any related deductions you take.
- You donate food to a charity. Many people donate canned goods and other items to charities such as food pantries. If you plan to deduct food items, you should keep your grocery receipt and get a receipt from the charity itself.
- You have a doctor-prescribed diet. Sometimes, items that are part of a medically prescribed diet can be deducted as a medical expense. If your doctor has prescribed a specific diet, you should save your grocery receipts to document items that are deductible.
Most taxpayers won’t need to hold onto grocery receipts, but if any of the above deductions are ones you plan to take, keep them to be sure you can back up your deductions.
Which Receipts to Keep on Hand if You Own a Business or Are Self-Employed
We’ve covered the receipts to keep for your individual income tax return, but some additional items become important if you either own a business or work for yourself.
Self-Employment Expense Receipts to Keep
The self-employed have additional tax obligations because they must pay both the employee's and the employer's portion of Medicare and Social Security taxes. However, many expenses related to self-employment are deductible, including the following.
- Supplies
- Materials
- Office expenses
- Insurance
- Travel
- Marketing
- Utilities
- Rent or mortgage (if you work from home and have a dedicated office space)
We suggest saving all business receipts related to your self-employment because many of these expenses are likely to be tax deductible.
The $75 Receipt Rule
One of the questions we often get asked is about the threshold for saving receipts. If you're a business owner, for example, you might wonder if you need to hold onto a receipt for $10 or if you can get rid of it.
The IRS's general rule is that taxpayers should be able to produce any receipt for more than $75. There are a few exceptions when you should keep receipts that are less than $75. For example, if you’re a business owner, you should keep all receipts for expenses related to overnight lodging. If you’re deducting travel expenses related to medical treatment, then you may want to label your travel receipts with some notes about the treatment and where you received it.
We should note here that if you decide not to keep a receipt that's less than $75, you will still need to keep a record indicating the expense and why it’s deductible. If you deduct the expense and you get audited, the IRS will expect you to be able to document that purchase or expense in general, even if you don't have a receipt.
Some people prefer to keep all receipts. If that provides you with peace of mind when you file your taxes, you can choose to do so. We'll talk later about how long you need to keep receipts for any deductions you itemize on your taxes.
Can I Use Bank Statements as Receipts for Taxes?
In some cases, you may be able to present a bank statement or a credit card statement as a receipt for taxes if you are audited. However, there are some exceptions, and you should know what they are.
According to the IRS, the following items must be documented at the time of your purchase and may not be recreated after the fact.
- Travel and Transportation
- Mileage
- Charitable donations
If you lose a receipt and get audited, your bank statement can be a backup in many cases. Technically speaking, an IRS auditor could deny your deduction if you don't have a receipt. However, if you can provide some reasonable reconstruction of the deduction, many auditors will allow it.
We should note that there are some potential issues with relying on statements. For example, you may have bought office supplies at Best Buy, but without a physical receipt, there’s no way to prove that the money you spent wasn’t for a gaming console.
How to Organize Receipts for Taxes
Since the IRS has the right to audit a tax return for six years, it's essential to maintain receipts to ensure you have them if needed. Here are some pointers to help you organize your receipts for tax purposes.
First, we suggest making notes on receipts if the deductible nature of the expense is not clear. For example, it's easy to understand why you bought three cases of paper at an office supply store, but you may not remember which client you entertained at your favorite Cajun restaurant three years after the fact. Jotting down the attendees' names and the meal's purpose on the back of the receipt will ensure that you have the information you need.
We also recommend photographing or scanning receipts and keeping paper copies. Receipts, particularly those printed on thermal paper, may fade over time. Getting audited is stressful enough without adding an ineligible receipt to the mix. You may choose to scan your receipts and store them electronically or take photos. Either way, make sure to include an image of the back if you’ve made notes there. This step will not only protect you against faded receipts but it will also serve as a backup if a flood or fire damages your records.
If you’re being audited, it's important to work with a qualified CPA or tax audit firm. Undergoing an audit on your own isn’t recommended and could result in you having stiffer penalties than you should.
Finally, it can be beneficial to maintain a detailed calendar for your business where you can make notes about deductible expenses. If you were to misplace a receipt but could show an appointment in your calendar that corroborates the expense, a reasonable auditor may still allow your deduction.
Of course, receipts should also be organized by category and by date. Many business owners choose to create subcategories. For example, you might keep your utility bills together, and so on.
Digital vs. Paper Receipts
A question we’re often asked is whether digital receipts are acceptable to the IRS. The answer is yes. The IRS has accepted both scanned and digital receipts as valid records since 1997.
Some requirements to keep in mind: Revenue Procedure 97-22 says that digital receipts must be stored so that they’re easily accessible to an auditor. They must also have a “high degree of legibility and readability.” Finally, they must be accurate, preserved, and easy to retrieve and reproduce.
The takeaway here is that digital receipts are acceptable, and so are paper ones. Your responsibility as a taxpayer is to ensure that any paper receipts you scan are stored as high-quality images in a system that you can use to retrieve them quickly.
How Long Should You Keep Receipts for Tax Purposes?
Many tax experts will tell you that you should keep receipts for tax purposes for three years from the date you filed or two years from the date you paid your taxes, whichever is later. However, as noted above, the IRS has the right to audit returns for up to six years. That means we recommend keeping all receipts related to tax deductions for six years at a minimum.
The IRS says you need to keep receipts for longer than three years in some circumstances. The first is if you claimed a deduction for worthless securities or bad debt, in which case you should keep your receipts for seven years. Employment tax records must be maintained for four years, and if you don’t file a return, you should keep your receipts indefinitely. You can find the full details on the IRS website.
What Happens if You Get Audited and Don’t Have Receipts?
Getting audited by the IRS is stressful, and the experience can be even more anxiety-inducing if you don’t have receipts to back up your deductions. Here’s what you need to know if this happens to you.
First, you shouldn’t panic. In many cases, receipts may be recreated. As we noted above, in some circumstances, your bank statement can be used as documentation. The exceptions include travel and transportation, entertainment, charitable donations, and mileage. If you don’t have original receipts in those categories, the auditor will probably disallow your deduction, increasing your taxable income and the amount you owe.
For expenses not in the categories we’ve listed, you might be able to get a replica of the receipt by contacting the company or provider. An example would be medical expenses, where you could call your doctor and ask them to send you a copy of the receipt.
If you find you can’t get copies of receipts, another option is to sign a declaration of your expenses. You’ll need to sign it under penalty of perjury, so be sure that the declaration is accurate.
Two major risks are associated with not having receipts to present to an auditor. The first is that your deductions could be denied, and that may result in you owing money to the IRS. The second is that in some cases, the IRS may charge a 20% negligence penalty. If you get audited, we recommend working with a tax pro to prepare documentation for the auditor.
Keeping Receipts is Important for Tax Filing Needs
If you itemize deductions, you must maintain complete records of deductible expenses and tax credits. If you keep your receipts, tax audits will go smoothly, and you can claim all personal and business expenses deductible. Of course, this is much easier if you have a qualified bookkeeper helping you run your business.
Do you need assistance reviewing your receipts and claiming tax deductions? CMP is here to help! Schedule your consultation today!
