tax records
May 5, 2017

Spring Cleaning for Taxes: Which Records Should You Keep and for How Long?

Another tax deadline has passed, and you may be wondering which records should be kept and for how long!  If you find yourself caught up in post-tax-deadline spring cleaning, try not to get too carried away, or you may find yourself throwing out important documents.

What Tax Records to Keep

In today’s world, it’s unnecessary to “keep everything;” however, you may want to err on the side of caution when deciding which tax records to keep.  The most important documents to retain are your annual tax returns.  You also should keep the supporting income and expense documents for the tax returns, including the following:

  • Form W-2s.
  • Form 1099s.
  • Schedule K-1s.
  • Rental income detail.
  • Student loan forms.
  • Expense records such as property taxes, mortgage interest, student loan interest, business expenses, and healthcare and medical expenses.

Records of Health Insurance Coverage

With the institution of the Affordable Care Act in 2014, you should maintain records indicating that you meet the annual minimum essential health insurance coverage.  Though these statements are not submitted to the Internal Revenue Service (IRS), maintaining them with your tax records will help avoid potential penalties.

Records of Stock and Mutual Fund Purchases

Retain records of all stock and mutual fund purchases to ensure that you report the appropriate basis and determine the appropriate gain or loss when sold.  This will also reduce the risk of errors should you switch brokers.  In addition, keep records of reinvested dividends from your investments.  These amounts impact your basis, and you want to avoid being taxed on the full amount of proceeds when you sell the securities.

Records of Home Improvements

Retain records of all improvements made to your house.  Generally, profits from the sale of your principal residence are not taxable if you have owned and lived in the residence 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.  As the costs of home improvements increase your basis in the home, maintaining the records may assist in reducing any taxable gain should you fail to meet the requirements for exclusion.

How Long to Keep Tax Records

As a general rule, the IRS recommends keeping copies of tax returns and supporting documents for a minimum of three years—the IRS “statute of limitations”—meaning you may revise or amend your tax filings for the last three years.  Additionally, the IRS may audit, question, revise, or request additional information on tax filings for the last three years.  The “three-year clock” begins with the date the tax return is filed or the date due of the tax return, whichever is later.  For partners in a pass-through entity or shareholders in an S corporation, the statute of limitations is controlled by the filing deadline of the individual’s tax return.

If you omit a substantial amount of income (more than 25% of the gross income stated on the tax return), the IRS statute of limitations becomes six years.  If you never file at all, the clock never runs, and the three- and six-year statutes of limitations do not apply.  The retention time may also depend on the action, expense, or event which the document records.  Generally, you should retain records that support an item of income, deduction, or credit shown on your tax return until the statute of limitations for that tax return expires.

There are certain documents that you must keep beyond the three- and six-year limits.  Form 8606, Nondeductible IRAs, should be retained until you withdraw all of your money from an IRA.  It’s also advisable to retain IRA records, including Roth contributions, until you withdraw all money from the account.  Retaining these documents may help you avoid double taxation.

Organization and Other Tips

A general rule is to keep your tax records organized (for instance, not piled in a shoebox).  Documents should be organized by year and available for any questions that may arise from the IRS.  Additionally, keeping a copy of last year’s tax return readily available ensures the IRS can verify your identity should questions arise.

To avoid theft of private information, store documents in a safe, locked place.  An extra precaution might involve electronically converting and encrypting files.  Never email (unless encrypted) a document with personal identifiers or bank account information!  When you decide to dispose of an item, ensure that you use a shredder so that any personal or bank information is not at risk.

Here to Help

How long you retain your tax records and supporting documentation may depend on various factors, ranging from the type of documentation to when you filed your tax return.  For some, the record retention could be seven years or more, or even indefinitely.  PYA has developed a tool—Record Retention Schedule: Can I Throw This Away?—to assist you in determining appropriate retention periods by record or document type for both your individual or business records.

If you have any questions about income tax filing or record keeping, or would like to request a speaker on this topic for your organization or event, contact one of our executives below at (800) 270-9629.

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