What tax records to keep, which to shred
It has been nearly a week since 2011 income tax returns were due. Many tax payers may be wondering which records need to be saved and which ones can be shredded.
Keep old returns
According to Kiplinger magazine, keeping old returns is imperative. They contain information on your background that can be useful for mortgage applications, applying for disability and a variety of other situations. They can be also be very useful when filing your taxes next year. If storage is an issue, they can be be kept on a disk or other forms of digital storage, such as an online service like DropBox or SugarSync.
Keep for three years — or six
Main Street also recommends hanging onto W-2 forms, investment statements, supporting documents and all Forms 1099 for three years. That is the time frame the IRS has to conduct an audit. The exception to the three-year rule is if the IRS suspects you have under-reported income by 25 percent or more. In that case, the the federal tax collector can conduct an audit as late as six years from the time of filing.
Home sales records
Under the current tax code, most home sellers are no longer required to pay taxes on the profit of a home sale. Taxpayers filing singly can make $250,000 on a sale tax-free if they have lived in the home a minimum of two years out of the previous five. The same holds true for joint filers for up to $500,000. However, if the seller has lived in the home for less than two years, these records need to be kept. There may be a tax liability attached to it. However, home improvement costs can be applied against it, so those records need to be kept as well.
So-called “loss” records are also important to hang onto, says Main Street. If you have been the victim of robbery or identity theft, keep a detailed record, including dates, amounts and any law enforcement involvement.
It is also wise to keep records of any non-deductible IRA contributions, as reported on IRS Form 8606. These will come in handy when that money is taken out after retirement, to avoid being taxed on it twice.
What to toss?
So what documents can be safely destroyed? In most cases, the IRS can only audit you for up to three years, so supporting documents, such as cancelled checks and receipts, can be discarded after that time.
Monthly bank statements, ATM receipts and deposit slips can all be shredded after receiving a year-end statement from the financial institution. Generally, these items are also summarized online and can be printed out at any time if the need arises.
Shred old records
It is important to shred any personal documents before throwing them out to avoid identity theft. Trash cans are often targeted by those who want to steal your financial identity.
Today’s tax code is very complex, and record-keeping needs vary from individual to individual. This overview is far from comprehensive. For additional information and answers to specific questions, consult the IRS Publication 552, “Record-keeping for Individuals.”