Tax Retention Guide

How long do you need to keep tax records?

A good guide is to keep your records for as long as they might be needed for the administration of any provision of the IRS. What this means generally is that you should keep your records which support the items shown on your return until the period of limitations on that return runs out.

What is the period of limitations? It is the period of time that you to amend your return in order to claim a credit or refund or the IRS can assess additional tax. The table below shows the periods of limitations that apple to income tax returns. Unless otherwise indicated, the years in the table refer to the period starting after the return was filed. Even if you filed before the due date, it is still treated as having been filed on the due date.

Property: Keep any records you have that relates to property until the period of limitations expires for the year that you dispose of the property in a taxable disposition. You have to keep records to figure out your basis for calculating gain or loss when you sell or otherwise get ride of the property.

In most cases, if you received property in a nontaxable exchange, than your basis in that property is the same as the basis of the property you gave up. Follow the general rule that you need to keep the records on the old property, and the new property as well, until the period of limitations expires for the year that you disposed of the new property in a taxable disposition.

Keeping records for nontax purposes: Even after your records are no longer necessary for tax purposes, don’t get rid of them until you have checked to see if they should be kept longer for any other purpose. Sometimes your insurance company or creditors might require you to keep certain records longer than the IRS does.

 

Why Keep Records?

There are a number of different reasons to keep records. In addition to tax purposes, there are reasons you might need to keep records for insurance purposes or even for getting a loan.

Good records can help you:

• Identify sources of income. You could receive money or property from a number of different sources. With your records it is easier to identify the sources of your income. You will need this information to keep your business separate from nonbusiness income and taxable from nontaxable income.
• Keep track of expenses. There is a good chance that you might forget an expense unless you record it when it happens. Your records will be helpful in identifying expenses that you can claim a deduction. They will also help you determine if you can itemize deductions on your tax return.
• Keep track of the basis of property. It is important to keep records that show the basis of your property. Including the original cost or other basis of the property and any improvements you made.
• Prepare tax returns. It is essential to have records to help you prepare your tax return. Having good records will help you file quickly and accurately.
• Support items reported on tax returns. Keeping records is essential just in case the IRS has any questions about an item on your return. If the IRS does examine your tax return, you might be asked to explain the items reported. Keeping good records will help you to explain anything and come to the correct tax with minimal effort. If the IRS comes asking questions and you don’t have records, than you might have to spend time pulling together statements and receipts. If the documents cannot be produced, you may be penalized with additional tax and subject to penalties.

Income

Basic records can prove the amounts you report as income on your tax return. This income might include wages, dividends, interest and partnership or S corporation distributions. Those records also can prove that specific amounts are not taxable, such as tax-exempt interest.

Note: If you have received a W-2 form, be sure to keep Copy C until you start receiving social security benefits. Doing this will help protect your benefits just in case there are any questions about your work record or earnings during a specific year. Take the time to review the information shown on your annual (for working people over 25) Social Security Statement.

Expenses

You basic records can prove the expenses that you claim as a deduction (or credit) on your tax return. Deductions could include alimony, charitable contributions, mortgage interest, and real estate taxes. You might also have child care expenses that you can claim for a credit.

Home

Your basic records should allow you to determine the basis or adjusted basis of your home. You will need this information to help you determine whether or not you have a gain or a loss when you sell your home or to help you figure out depreciation if you used a section of your home for business or for rent. These records should tell you the purchase price, settlement or closing costs as well as the cost of any improvements. They might also show you any casualty losses deducted and insurance reimbursements for casualty losses. These records should also have a copy of Form 2119, Sale of Your Home, if you sold your home before May 7, 1997 and postponed tax on the gain from that sale.

After selling your home, the records will show the sales price and any selling expenses, such as commissions.

Investments

Your basic records could allow you to determine you basis in an investment and whether or not you have gained or lost when you sell it. Types of investments could include stocks, bonds and mutual funds. Records should show the purchase price, sales price and commissions. They might also show you any reinvested dividends, stock splits and dividends, load charges and original issue discount (OID).

Proof of Payment

One of the type of basis records is proof of payment. You should hold onto these records to be able to support certain amounts shown on your tax return. Proof of payment alone is not proof enough that an item can be claimed on your return. You also should keep other types of documents that will help prove that the item is allowable.

Generally speaking, you can prove payment with a cash receipt, financial account statement, credit card statement, canceled check, or substitute check. If you do make payments in cash, you should get a receipt that is signed and dated, showing the amount and reason for the payment.

If you make payment by electronic funds transfer, you might be able to provide proof of payment with an account statement.

Account Statements: You might be able to prove payment with a financial statement that has been prepared by your bank or other financial institution.

Pay Statements: You might have deductible expenses withheld from your paycheck, things such as union dues or medical insurance premiums. You should be keeping your year-end or final pay statements as proof of payment of these expenses.

Specific Records

Below is an alphabetical list of some things that require certain records in addition to your basic records.

Alimony

In the case that you receive or pay out alimony, keep a copy of the written separation agreement or the divorce, separate maintenance, or support decree. In the case that you are the payee of alimony, you will need to know your former spouse’s social security number.

Business Use of Your Home

You might be able to deduct specific expenses connected to the business use of your home. It is important to keep records that show the part of your home that is used for business and the expenses related to that use.

Casualty and Theft Losses

To be able to deduct a casualty or theft loss, you have to be able to prove that you did indeed have a casualty or theft. These records will also need to show the amount you claim.

For a casualty loss, the records must be able to show:

• The type of casualty (car accident, fire, storm) and when it happened.
• That the loss is a direct result of the casualty, and
• That you are the owner of the property.

For a theft loss, the records must be able to show:

• When exactly you discovered that the property was missing.
• The property was stolen, and
• You were the owner of the stolen property.

Child Care Credit

You must be able to provide the name, address and taxpayer identification number for all people or organizations that provide care for your child or dependent. You do have the option of using Form W-10, Dependent Care Provider’s Identification and Certification, or a number of other sources to get the information from the care provider. Be sure to keep this information with your tax records.

Contributions

You have to keep records that are able to prove the contributions you make during the year. What type of records depends on whether the contribution in cash, noncash or out of pocket expenses. For more information on contributions and the type of records you should keep, see Publication 526, Charitable Contributions.

Credit for the Elderly or Disabled

If you’re under the age of 65, then you need to have your physician complete a statement certifying that you were/are permanently and completely disabled on the date you retired.

You don’t have to file this statement with Form 1040 or Form 1040A, but you do have to keep it for your records.

If the Department of Veterans Affairs (VA) certifies that you are permanently and completely disabled, you can substitute VA Form 21-0172, Certification of Permanent and Total Disability, for the physician’s statement you are required to keep.

Education Expenses

If you do have the records that can prove your expenses, you might be able to claim tax benefits for your education expenses. You might also qualify to exclude from income items like qualified scholarship, interest on U.S. savings bons, or reimbursement from your employer. You might also qualify for certain credits or deductions. You should be keeping documents like transcripts and course descriptions. These documents should show periods of enrollment and canceled checks and receipts that can verify the amounts you spent on tuition, books, and other educational expenses.

Exemptions

If you claim an exemption for your spouse or dependent (a qualifying child or a qualifying relative), you have to keep records that support the deduction.

Employee Business Expenses

Having employee business expenses, see Publication 463, Travel, Entertainment, Gift and Car Expenses, for a discussion of what records to keep.

Energy Incentives

If you’re looking to claim one of the tax incentives for the purchase of energy-efficient products, you must keep records to prove:

• How and when you acquired the property,
• The purchase price of the property, and
• That the property qualified for the credit.

List of the following documents might show this information.

• Sales and purchase invoices.
• Manufacturer’s certification statement
• Canceled checks

Gambling Winnings and Losses

Keep a detailed diary of your winnings and losses that include the:

• Type and date of the gambling activity,
• Address and name or location of the gambling establishment,
• Names of any other persons present at the gambling establishment with you, and
• Amount you won or lost

Health Savings Account (HSA) and Medical Savings Account (MSA)

For every qualified medical expense you pay out your HSA or MSA, you have to keep a records of the name and address of each person you paid with the exact date and amount of the payment.

Individual Retirement Arrangements (IRAs)

Be sure to keep copies of the following records and forms until all distributions are made form your IRS(s).

Form 5498, IRA Contribution Information, or similar documents by year that is showing contributions you made, distributions you received and the value of your IRA(s).

Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., received for each year you received distribution.

Form 8606, Nondeductible IRAs, for every year that you made a nondeductible contribution to your IRA or received distributions from an IRA if you’ve ever made nondeductible contributions.

Medical and Dental Expenses

On top of the records you keep of regular medical expenses, you should also keep records of transportation expenses that are mostly for and essential to medical care. Take note and record these expenses in a diary. Gas and oil expenses that are directly related to that transportation. If you want to keep records of your real expenses, you can log miles you drive for medical purposes and use standard mileage rate. Also keep records of any parking fees, tolls, taxi fares and bus fares.

Mortgage Interest

If you have paid mortgage interest of $600 or more, then you should be receiving Form 1098, Mortgage Interest Statement Keep this form and your mortgage statement and loan information in your records.

Moving Expenses

You might be able to deduct qualified moving expenses that aren’t reimbursed.

Pensions and Annuities

For your tax return, use the worksheet in your tax return for part of your pension or annuity. Make sure to keep a copy of the completed worksheet until you fully recover your contributions.

Taxes

Form(s) W-2 and Form(s) 1099-R will show you state income tax withheld from your income and pensions. Make sure to keep a copy of these forms to be able to prove the amount of state withholding. If you have made estimated state income tax payments, you will have to keep a copy of the form on your check(s).

You will also need to keep copies of your state income tax returns. If have received a refund of state income taxes, the state might need to send you Form 1099-G, Certain Government Payments.

Also be sure to keep mortgage statements, tax assessments or other documents as records of the real estate and personal property taxes that you’ve paid.

If you have deducted actual state and local general sales taxes instead of using the optional state sales tax tables, you will have to keep your actual receipts showing general sales taxes paid.

Tips

Keep a daily record to best accurately report your tips on your return. You can use Form 4070A, Employee’s Daily Record of Tips, which can be found in Publication 1244, Employee’s Daily Record of Tips and Report to Employer, to record your tips.