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It's time for post-filing tax record keeping

Tax-Records-How-to-Set-Up-an-Efficient-System

It's been almost a week since Tax Day 2015. That's why today's Tax Form Tuesday is celebrating Form 1040.

Actually, this week's feature includes not just the actual tax return you recently sent to the Internal Revenue Service, but also the many forms and schedules that accompanied your return, plus all the associated documents you used to complete it.

Yep, we're talking tax record keeping.

There's no federal tax law or IRS regulation detailing a preferred way to keep your tax records. That's because every taxpayer situation is different.

But the one constant is that you do need to hang onto any material that will help you answer any filing follow-up questions the IRS might have.

Again, since everybody's taxes are different, this is a broad look at tax records. And since I tend to err on the side of over-documentation, it is a bit long. So let's get started.

Your 1040: The main record everyone should have and keep forever — more on how long you need to keep tax material later — is your actual form 1040.

Not only is a 1040 a good indicator that you fulfilled your annual tax-filing obligation, but you'll want it handy if the IRS comes to with questions about something on it. You'll also need the form's original information if you later find you need to file an amended return.

1040 forms also come in handy for non-tax reasons, such as applying for a loan. And your return is a great reference and guide for filing future tax returns.

Requesting Old Tax Returns
If you don't have all your old 1040s, here are some bonus
Tax Forms Tuesday docs you can use to get your prior filings or the information in them from the IRS.

Request a copy of a previous return by sending the IRS Form 4506, Request for a Copy of Tax Return. There is a charge for such copies.

If you don't want to pay, you can opt instead to get a free tax transcript, which is a printout of the key info entered on your return. Getting this is easy to do online at Get Transcript or by calling the IRS toll-free at (800) 908-9946. You also can file Form 4506-T, Request for Transcript of Tax Return, or Form 4506T-EZ, Short Form Request for Individual Tax Return Transcript, to get the information.

 

With the enactment of the Tax Cuts and Jobs Act (TCJA) that took effect with the 2018 tax year, the Form 1040 was changed. Now it's just one (instead of the previous three) and it has, this year, just three (instead of six) associated schedules. You need to keep a copy of those schedules, too, as well as any other forms you sent to the IRS.

Make a copy, either digital or paper or both, of your full, final 1040 et al that you filed.

Income: Of course, the main reason for filing a 1040 is to report your income. So you also should keep all the records that show what you earned. There are many sources of income, such as wages, dividends and interest and partnership or S corporation distributions.

The type of records you have to prove your income depends on how you got it. Your salary, for example, will be on your W-2. Investment earnings show up on a variety of 1099 forms.

You also might want to hold onto your final pay statement/paycheck stub of the tax year. It could show potentially deductible expenses withheld from your paycheck.

The bottom line is that any document that shows you got paid needs to go into your files.

True, these income records tend to work in the tax collector's favor, showing that you got money from which Uncle Sam is due a part. But these records also can prove that some amounts, such as tax-exempt interest or qualified investment earnings, are not subject to tax or are taxed a lower rates.

Expenses: Any records that show the expenses for which you claim a tax deduction or credit need to be saved. When it comes to deductions, this includes records of such things as medical expenses, charitable contributions, mortgage interest, real estate taxes, state and local income taxes and property losses in a major disaster. Savvy readers have realized that these are expenses usually claimed when you itemize on Schedule A.

There are, however, other deductions — technically known as adjustments to income and still called, by me anyway, above-the-line deductions — that anyone can claim, regardless of whether they use the standard deduction or itemize. These now are on the Form 1040 Schedule 1 and include such things as educators' out-of-pocket expenses, contributions to retirement accounts and insert you paid on a student loan.

The same is true for any credits you claimed. Say you took courses to improve your work skills. You'll want those payment receipts to show that your Lifetime Credit Claim was legit. The same for the records to the caretakers who, before the coronavirus sent all of us home with our families, took care of your youngsters after school until you finished up at work and picked them up. That will substantiate any questions an IRS auditor might have about your child care credit claim.

These proof of payment documents include, but are not limited to, official receipts, financial account statements, credit card statement or canceled checks. Note that while the IRS will welcome these documents, they alone aren't necessarily sufficient to convince an auditor that an item claimed on your return is allowable. So also keep other documents that will help prove that the item is allowable.

Even some official tax correspondence could come in handy, as long as you have it handy.

This year, for example, millions received COVID-19 economic impact payments. That amount is an advance tax credit for the 2020 tax year. Folks who didn't get the full $1,200 credit plus any extra for qualifying minor children might be able to get the rest when they file their returns next year. That's why the follow-up letter indicating you got a certain stimulus amount is a tax document you need to save.

Again, your Form 1040 that you filed away is a good guide as to what expense documentation you need to keep.

Home: Your home could provide some immediate tax claims, such as the previously mentioned real estate tax deduction. But you also need to keep records that will help when you sell.

In most cases, homeowners won't owe tax on the profit from the sale of their primary residence. But if you're close to that no-tax threshold, which is $250,000 for a single home owner or $500,000 for a jointly filing couple, good records will help you determine your home's basis or value. That basis is what you subtract from your sales proceeds to determine if you have a gain or loss on your home sale.

If you used part of your home for business purposes or at some point rented it, then you'll also need thorough home records to figure any related depreciation recapture.

Basis starts with what you paid for your property. It's adjusted over the years by improvements you make to the place. So hang onto to all your home-related work receipts.

Even if you don't have any tax-related home issues in a (or several) tax years, you need to keep your residential records until you sell … and beyond. Remember, the IRS has several years — more on these statutes of limitations coming up — to come back to you with questions about something on your return or not there, such as nontaxable home sale profit.

And if you're lucky enough to have a vacation/second home, keep all the similar material for that property, too.

Investments: While investment information is part of your income records, you need to keep more than an asset's single tax year payout amount. You'll want documentation to help you to determine your basis in an investment, just like that of your home, and whether you have a gain or loss when you sell it.

Investments include stocks, bonds, and mutual funds and in most cases, transactions made throughout a tax year that produce taxable consequences. This includes not just your purchases of the investment vehicles, but also any reinvested dividends and stock splits.

These asset actions will be used in addition to your records showing your purchase price, sales price and commissions to determine how much tax is due, either at ordinary tax rates for short-term sales or lower long-term capital gains on assets held for more than a year.

As with your real property records, hang onto all investment records for as long as you own the assets. And as with your real property records, hold onto them for a while after you sell to ensure you clear the time frame that the IRS has to review your filings of which they are a part.

How long to keep tax records: OK, you've got all this stuff and you've stored it in a filing cabinet or on a thumb drive. Now you want to know how long you must hold onto it, especially those paper files.

The old joke is forever, since technically the IRS can come asking questions any time it suspects a taxpayer committed fraud.

But more realistically for most of us who do our best to get our tax returns right each year, there are some shorter time periods in connection with your tax records. These are the period of limitations set for particular tax circumstances.

These time frames are how long you have to amend your return to claim a credit or refund or how long the IRS has to review your filing and assess additional tax in connection with your return.

 

If you —

Then you have —

1.

File a return and circumstances 2, 3 and 4 below
don't apply to you

3 years

2.

Don't report income that you should and it is more than 25% of the gross income shown on your return

6 years

3.

File a fraudulent return

No Limit

4.

Don't file a return

No Limit

5.

File a claim for credit or refund after you filed your return

The later of
3 years or 2 years
after tax was paid

6.

File a claim for a loss from worthless securities
or bad debt deduction

7 years

The years noted above generally refer to the time period beginning after the return was filed. Returns filed before the due date are treated as being filed on the due date.

Burden of proof: Record keeping sometimes can seem like a bigger hassle than actual tax filing. I totally get that. As I noted, I tend to err on the side of over-saving. During this coronavirus self-isolation period, I took advantage of the time to finally clear out almost two decades of tax material.

 

 

True, much of that was work-related tax documents. But I also cleared out some personal tax files, too. But not too many.

The main reason I'm a borderline hoarder when it comes to taxes is that the burden of proving your tax return is complete and accurate falls on you. You must convince the IRS that all your claims were legitimate.

The best way to do that is to show them proof, either on paper or digitally, of why you took that particular tax break.

Musical interlude: My Tumbling Taxes post on tax record keeping also takes a look at other records, specifically those we play for entertainment.

Yes, I'm old enough to remember actual, vinyl records when that's all there was, either as 45 or 33⅓ RPM versions.

When you're through with your tax filing and record keeping duties, take a musical break with your favorite tunes in whatever format, newfangled or old-school, that you prefer. Then check out the record-related movies and streaming show mentioned at Tumbling Taxes

You also might find these items of interest: 

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