Don't Mess With Taxes

 

Tax season is done for most filers. We’ve made it through April’s main Tax Day, and this week’s extension filing deadline.

Now it's time for some clean-up and record keeping.

But before you start tossing tax documents, make sure you know which can go and which you need to keep. And for how long.

The time frame for hanging on to tax-related material generally is determined by the Internal Revenue Service’s audit statute of limitations. That essentially means that you need to hang on to some of the material for as long as the IRS has to question your filing.

That could be weeks, months, or years from now. Some documents you might need to save forever.

IRS audit timetable: The table below shows the IRS’ statutory time frames when it comes to auditing a return.

The years noted generally refer to the time period beginning after the return was filed. Returns filed before the due date are treated as if they were filed on the due date. That would be, for example, April 15 for Form 1040s filed before that date, and Oct. 15 for returns that were extended.

   
No limits are not good news: Note the two “No Limit” periods.

If you’ve missed filing a tax return, it would be worthwhile to get that paperwork to the IRS for, among other reasons, to limit the tax agency’s audit period.

And if the IRS’ ability to audit you at any time is because you filed a fraudulent return, then you should consider talking to a tax professional about the best way to proceed.

In addition to noting how long you should save tax-related documents, the IRS also has some suggestions on some records you should keep for longer that the years shown in the table. Here are three such instances.

Property records: Keep records relating to the acquisition of real estate and other property until the period of limitations expires for the year in which you dispose of, typically via a sale, the property.

Such documentation is critical for homeowners. Some records, such as your mortgage interest or real estate taxes, could be used to claim itemized tax deductions. That’s also the case if your home was damaged in a major disaster.

However, in other cases the records relating to your residence won’t be used until you sell your home. Many home sellers won't owe tax on the profit. Up to $250,000 in home sale profit for single owners, or $500,000 for a jointly-filing married couple, generally is non-taxable. That amount applies when the seller(s) have lived in the house for at least two out of the past five years.

But residential sale profit over those exclusion amounts is subject to capital gains tax, which is zero percent, 15 percent, or 20 percent, depending on your taxable income.

If your home sale profit is more than the excludable amount, good records of improvements to your property, from a structural addition to total re-do of your kitchen to landscaping, could help you get under the no-tax profit threshold.

Allowable upgrades — remember, these are property improvements, not just repairs and maintenance — add to your home's basis, which is subtracted from your sales amount to arrive at your profit. The larger your basis, the lower your profit … and potential tax.

Until you sell your home, you need to hang on to all documents that show these improvement costs.

Healthcare insurance: You should keep records of your own and your family members' health care insurance coverage. This is particularly important if you obtained coverage through the Health Insurance Marketplace and are claiming the premium tax credit to help cover that policy. You'll need information about any advance credit payments you received to pay for your coverage and the premiums you paid.

Business income and expenses: If you're a business owner, you’ll need to keep all records that substantiate both your income and expenses for the audit time periods. If you have employees, you also must keep all your employment tax records for at least 4 years after the tax becomes due or is paid, whichever is later.

All the audit periods and specific records aside, there are some basic tax documents you need to save every year.

Form 1040: The main record everyone should have and keep forever is your actual Form 1040. That includes all attached schedules and other forms that accompanied its delivery to the IRS.

Not only is a 1040 a good indicator that you fulfilled your annual tax-filing obligation, you'll need it for reference if the IRS has questions about something on it.

You'll also need the form's original information if you later find you need to file an amended tax return.

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

Income statements: Since what we pay is an income tax, obviously we want to keep income statements. There are many sources of income, such as wages, dividends and interest, sales of capital assets, partnership or S corporation distributions, and self-employment earnings.

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. 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.

Investment earnings show up on a variety of 1099 forms. This includes statements of accounts that are still paying dividends and/or capital gains, as well as those when you finally sell any assets.

And if you have investments in retirement accounts, either traditional tax-deferred plans or Roth versions that are tax-free, these statements will help you with any tax due when you start taking distributions.

Tax-deductible expenses: Most taxpayers claim the standard deduction, but if you do itemize, you'll definitely want to keep records of those expenses that are deductible on Schedule A.

These itemized deduction records include such things as medical expenses, charitable contributions and acknowledgement receipts from the nonprofits, mortgage interest, real estate taxes, state and local income taxes, and property losses in a major disaster.

Then there are the other deductions, technically known as adjustments to income and still referred in the tax world as above-the-line deductions, that anyone can claim, regardless of whether they use the standard deduction or itemize. These are for such things as educators' out-of-pocket expenses, contributions to retirement accounts, and interest you paid on a student loan.

Finally, there are records connected to any tax credits you can claim. Tax credits offer dollar-for-dollar reduction of any tax you owe. In the case of refundable tax credits, where you have more credit than tax bill, you can get the excess credit as, you got it, a refund.

Tax credits, like above-the-line deductions, are available to eligible taxpayers regardless of which deduction method is used.

How to store tax records: While the IRS recommends you keep relevant tax documents, there is no federal tax law or tax agency regulation detailing a preferred way to keep your tax records. That's because every taxpayer situation is different.

If you're a paper devotee, then set up a filing cabinet system. 

Personally, I love the protection that redundancy offers. Most of my records are digital, which a couple of back-up safeguards. But I also hold on to some paper records as well. But you do you when it comes to your documentation comfort level. 

The one constant for any record keeping system is that you store in it any material that will help you answer any filing follow-up questions the IRS might have. The material could help you meet the burden of proof that we taxpayers face when the IRS has questions about our filing entries. Here’s the IRS’ discussion of that burden —

"The responsibility to prove entries, deductions, and statements made on your tax returns is known as the burden of proof. You must be able to prove (substantiate) certain elements of expenses to deduct them. Generally, taxpayers meet their burden of proof by having the information and receipts (where needed) for the expenses. You should keep adequate records to prove your expenses or have sufficient evidence that will support your own statement. You generally must have documentary evidence, such as receipts, canceled checks, or bills, to support your expenses. Additional evidence is required for travel, entertainment, gifts, and auto expenses."

The bottom line is that any document that shows you got paid needs to go into your files. You can toss them when you’re confident the audit statute of limitations has passed. Or you can hang onto them for as long as you’re comfortable, and have storage space!

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 at lower rates.

Here's hoping you never have to dig out old records to justify a tax claim to an IRS auditor. But if you set up a solid record keeping system and stick to it, if that happens, you'll be ready.

You also might find these items of interest:

• 7 tax record keeping FAQ
• Tips on safeguarding data from natural disasters
• Tips on rebuilding tax and other records lost in a disaster

Advertisements

🌟 Explore Prime for Young Adults 🌟
The text link above is an affiliate ad. If you click through and then buy a product, I receive a commission.