4/2/2014 6:15 PM ET|
Tax records you can toss (and what to keep)
After you've filed your taxes, it's OK to shred statements and stubs you no longer need. But be sure to keep your actual tax returns.
A reader asks: "I just filed my taxes and am wondering what records I need to hold on to and what I can throw away?"
Keep your actual tax returns forever
They can help when you, say, apply for a mortgage or disability insurance or need clues to the value of other assets. (You don't need to keep the originals; you can scan the tax returns and keep a digital archive.)
The IRS generally has up to three years after the tax-filing deadline to initiate an audit, so you should hold on to supporting documents for at least that long. Those documents include credit-card statements, canceled checks, debit-card transactions and receipts showing deductions; letters from charities reporting gifts; and paperwork reporting mortgage interest, capital-gains distributions and income.
"A few months ago, we saw an influx of clients getting letters from the IRS about their 2011 returns," says Laurie Ziegler, an enrolled agent in Saukville, Wis., and a director on the board of the National Association of Enrolled Agents (enrolled agents are authorized to represent clients in front of the IRS). See IRS Publication 552, Recordkeeping for Individuals, for more information about tax records.
Most people can safely shred those supporting documents three years after the tax-filing deadline. But people who are self-employed or who have a small business, income from a variety of sources or complex tax situations should keep their records longer. The IRS has up to six years to audit people who neglect to report more than 25 percent of their income.
Ziegler usually keeps her tax files for seven years, just to be safe. "I keep everything in a box," she says. "When I put the most current year in, I pull out the oldest year and shred it." Shred the old documents rather than just throwing them away, so you don't create a treasure trove of personal information for ID thieves.
Other tax files you should keep include records establishing the basis of your assets for as long as you own the asset (you should file those records with your tax files for the year you sell the asset).
Keep records showing the purchase date and price of stocks and mutual funds in taxable accounts
When you sell the investment, you'll have to report the purchase date and price so you can establish the cost basis. Brokers are required to report the cost basis of stocks purchased in 2011 or later and mutual funds and ETFs purchased in 2012 and later, but Ziegler says it's a good idea to keep your own records even for purchases after those dates in case you switch brokers.
Also keep records of reinvested dividends that you've already paid taxes on, so you can add them to your basis when you sell and you won't have to pay taxes on them twice. If you inherit any stocks or funds, keep records of the value on the day the original owner died, which will generally be the basis when you sell it.
Keep Form 8606 reporting nondeductible contributions to traditional IRAs
Hold on to this until you withdraw all of the money from the IRAs. That way, you'll be able to prove that you already paid taxes on the contributions and you won't have to pay taxes on that portion of the money again when you start taking withdrawals. See "Deductible vs. nondeductible IRA contributions" for more information.
Keep records of your home purchase cost and home improvements
You generally aren't taxed on home-sale profits if you've lived in the home for at least two of the past five years and your profit is less than $250,000 if single or $500,000 if married filing jointly. But if you live in the home for a shorter time or have a bigger profit, you may have to pay taxes on part of your profits, and you can add the cost of major home improvements (not basic repairs) to the basis to reduce your taxable gain.
What to toss
You can toss pay stubs as soon as the information matches up with your W-2 for the year (but keep your December pay stub if it shows charitable contributions made via payroll deduction).
You can toss monthly brokerage statements when the information matches up with your year-end report and your 1099s. You can toss most credit-card receipts that you don't need for tax purposes after you check them against your monthly bill.
And you can usually toss utility, phone and cable bills as soon as the next month's bill arrives, unless you need them for tax purposes. For example, you should hang on to them if they show self-employed business expenses or they're used for a home-office deduction, or if you want to show prospective home buyers the average monthly cost of your utilities.
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Taxes on wages (in any form – flat or progressive) are the greatest evil of our American Republic. When government is free to steal from you, there are no limits to waste and abuse in government. If a person chooses to work extra hours or two jobs in order to better provide for themselves or their family, they should not be penalized, but that is what happens. The more you make by working harder and longer, the more money is stolen from you, and given to those who spend their lives living off the hard work of others.
The revenue the government needs to provide legitimate constitutional services should be obtained primarily from a national sales tax instead of a tax on wages. All would pay based on consumption, the more you spend the more you pay. The more luxury you surround yourself with, the more you pay. Your choice. A national sales tax system would capture money spent by criminals and by illegal aliens who currently pay near zero in taxes. There would of course need to be exemptions: Cars (already have a federal excise tax) Primary Residence/Rental Properties (vacation homes would be subject to tax/rental profit would be taxed) Fresh Food (Preprocessed foods and prepared meals would be taxed – only fresh/fresh frozen/canned goods would be exempt) Insurance Premiums, Health Care & Certified Education.
Adding another layer of tax to a business would not be fair. Businesses would need to be compensated by keeping a portion of the tax to cover the expense of collection and reporting. A percentage of .20 to .05 would be fair.
"Keep your actual tax returns forever....(You don't need to keep the originals; you can scan the tax returns and keep a digital archive.)"
That's bad advise. If you want to be able to access your tax returns in say, 50 years, keep the original hard copy. I wouldn't count on being able to access the electronic record even 10 years from now.
IRS sent me a letter that say I don't have to file any more cause I don't make enough money. I'd rather have my back back, the was it was before the fall.
You are such idiots. I will never destroy a tax return. Not with this government. Bet they will audit me after this post.
Lois is living large. signed lower to middle class. LOL
Let's face it: The IRS is judge, jury, and executioner all rolled into one. When they want to get you, you're going to be got, saved records or not.
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