Now that you’ve filed your tax return (congratulations!), you’re probably wondering, “what do I do with all these documents on my kitchen table?” Don’t trash them! This question comes up for taxpayers all the time— do I need to maintain my tax records by filing them away, or can I destroy them? The IRS can start a tax audit at any point up to three years after the tax filing due date of a return, or three years from the date you filed the return. However, the IRS can audit a return farther back than three years in certain circumstances. That’s why here at The Becerra Group, we recommend you keep all tax records for seven years, and even longer for certain real estate transactions. The good news is you can keep the paper documents, or scan them and keep digital copies. Below is a guide on what length of time you need to maintain and retain specific general documents and income tax records.
Tax Records to Maintain One Year
Retain paycheck stubs for the entire year. This gives you the documents you need to compare them to your Form W-2, to check totals for accuracy. Once you confirm totals on the W-2s you received are the same as your paycheck stubs, it is okay to destroy the paycheck stubs. Use the same strategy regarding stock brokerage statements. Keep the statements until you compare the totals on Form 1099s to the totals on the statements. Once you have done that you can destroy the statements.
Tax Records to Maintain Three Years
Tax records should be retained for three years after the deadline to file taxes, or three years from the date you filed the return. This would be all the document records that prove income, expenses, deductions, and tax credits used to complete your tax return. The three-year IRS record retention rule includes W-2s, all Form 1099s, all Form 1098s, canceled checks and document receipts for expenses and charitable contributions, health savings account withdrawals, 529 college-savings plan withdrawals, and retirement plan contributions.
Tax Records to Maintain Six Years
If you mistakenly or purposely omitted more than 25% of your gross income on your return, the IRS has six years to start an audit. Consultants and service providers receive several 1099s each year. It is so simple to not include 1099 income if the document is lost or never received from the issuing company. Be prudent by keeping 1099s, related receipts, and all business expense documentation for a minimum of six years.
Tax Records to Maintain Seven Years
People buy stocks that get delisted or encounter huge stock market corrections where people sell stocks for huge losses in the tens of thousands of dollars. If that happens to you, you most likely will be able to write off the losses on your stock holding sales on your tax return (limited to $3,000 per year). Be certain to retain the brokerage account statements and related documents for a minimum of seven years (stock trade notifications are sent to stockholders from brokerage account companies for each trade). Seven years is the time given by the U.S. code to claim losses incurred from stock sales.
Tax Records to Maintain Regarding Investments and Property
Save records for a minimum of three years after the sale of any investment or property. For instance, Roth IRA contribution records should be kept for a minimum of three years. These records are required to document that taxes have been paid on contributions that have been disbursed out of an account to its owner. You do not want to be taxed on them a second time when the money is taken out. Retain stock brokerage account statements for three years. The statements document stock, bond and mutual fund purchases, and sales made in your account. Taxpayers are required to report purchase price and date when filing income taxes each year to document the cost basis of the security. The cost basis of a security gives the taxpayer the documentation for proving a gain or loss when it is sold. Brokerage firms report the cost basis of stocks and exchange-traded funds to the IRS.
Retain records and documents for any property inherited or received as a gift for a minimum of three years after it you sell it to prove the property’s cost basis. Usual and customary cost basis of property is predicated on the fair market value of the property at the time it was deeded into your name.
Retain receipts for home improvements and home buying documents for a minimum of three years after your sell your house. With current home sale capital gain tax laws in place today, taxpayers do not pay taxes on most home sale transactions. There is a homestead exemption on home-sale profits of $250,000 for single people and $500,000 for joint income tax filers. For this to apply, a home must have been lived in two of the last five years prior to the sale. The cost of home improvements can be added to the cost basis of the home to lower your tax liability.
Tax Records to Maintain Regarding State Income Tax
Be sure to investigate your state’s tax record-keeping policies as well and keep your state income tax records accordingly. The Taxation and Revenue department in your state most likely has a larger proportionate staff and therefore has the ability and potential inclination to audit more tax returns annually than the IRS.
If you need help preparing your 2020 tax return, or prior year returns, feel free to contact the tax experts at The Becerra Group. Call us at 505-462-9090 (NM) or 830-254-4708 (TX), or click here and complete our online contact form. We are here to serve all your tax, accounting, and bookkeeping needs.