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Proving tax deductions without cancelled checks

There is a growing trend toward remote deposit of checks. Because of the increasing sophistication of smartphones, you can now photograph a check written out to you and digitally send it to your bank for deposit. All this and more became possible after the Check Clearing for the 21st Century Act (Check 21) became effective in 2004. As a result of this act most banks discontinued the practice of retaining a paper version or copy of your checks. Check 21 allowed banks to truncate each of your checks, create a new electronic negotiable instrument called a substitute check, and then destroy the originals.

This industry change has important tax consequences for taxpayers who previously used checks to substantiate their expenses or charitable contributions. But the bottom line is that Check 21 allows you to use a substitute check as proof of payment because it is legally the same as the original check. The IRS, therefore, must accept your substitute check as proof of payment.

Many individuals have switched to online banking. If so the IRS will accept image statements of substitute checks as proof of payment. If, however, an IRS auditor is suspicious that the image statement is not genuine, you may still be requested to order the actual substitute check from your bank. This will be a rare instance, however, and will likely occur only if you are audited. As an additional precaution, we suggest that you download and print out your bank statements at the end of the year. That way, even if you are audited several years from now, you’ll have a record that’s easy to access.

If you still rely on paper bank statement and paper copies of your checks, keep them in good order. The IRS will still accept bank statements that contain images of cancelled checks and/or substitute checks. To be used as proof, an account statement must show check number, amount, payee’s name, and the date the check was posted. In order to keep track of your payments more easily for tax purposes, you should also continue to or begin to maintain a careful check register. That way, you’ll know on which bank statement to look if you are ever audited.

Can I deduct car expenses for business, medical, and charitable purposes?

Yes, and the easiest method to deduct your car expenses is to use the standard mileage rates set by the Internal Revenue Service (IRS). For 2016 you are allowed to deduct $.54 per mile for business, $.19 for medical and moving, and $.14 for charitable). The use of these rates simplifies your record keeping since you do not have to keep track of gas & oil, repairs, insurance and license amounts, nor do you have to set a ratio of business to personal use of your vehicle. You are only required to keep a record of the miles driven (date, distance, purpose). A mileage log book or spreadsheet will suffice. I have yet to understand why the IRS will allow less deduction for driving your car for medical appointments, to move, or perform charitable services than it will for a business expense. To deduct the medical or charitable auto expenses, you will need to itemize your deductions.

Moving expense deductions

Moving expenses are only deductible if you move to a new home because of a job change, and the following requirements are met: (1) the move is made within one year of starting the new job and the new job location must be at least 50 miles further from your old home than the old workplace was. If you did not have an old workplace, the new workplace must be at least 50 miles from the old home, (2) you must work in the general area of the new workplace at least 39 weeks during the 12 months after the move (unless you are transferred by the new employer to another location, are laid off for other than willful misconduct, become disabled, or are in the military). Your new job does not have to be in the same line of work as your old job. The deductible moving expenses include the cost of moving and storing (up to 30 days) household goods, travel & lodging and moving from the old home to the new home (does not include meals on the way, temporary living expenses, or house hunting before or after the move).

The office of Moats & Hebebrand CPA’s makes a concerted effort to stay on top of the changes in the tax laws so you don’t have to. Let us prepare your 2015 tax returns so you know they are done right! We are also open all year to assist with tax planning and to take care of our customers.