Q: Having filed my taxes I am wondering what records I need to hold on to and what I can throw away.
A: 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% 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 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.
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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. See Cost Basis for Inherited Stock for details.
Keep Form 8606 reporting nondeductible contributions to traditional IRAs 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 Versus 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.
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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Kimberly Lankford is a Contributing Editor for Kiplinger's Personal Finance.