You should keep information that you and the IRS need to determine your correct tax. The following is what you should keep:
Copies of tax returns. Keep copies of your tax returns as part of your tax records. Your tax returns can help you prepare future returns and amended returns. Copies of your tax returns and other records can be helpful to your survivors or the executor or administrator of your estate after you pass.
Proof of income and expenses. Listed below are examples of income and expense documents you should keep. The list is not all inclusive.
• Form(s) W-2, 1099, and Schedules K-1
• Bank and brokerage statements
• Business and hobby income records
• Records relating to sale of business property
• Sales slips, invoices, receipts
• Cancelled checks or other proof of payment
• Medical expenses
• Mortgage interest
• Real estate tax records
• Details of cash and noncash contributions
• Written communications from qualified charities
• Closing statements, including any refinance documents
• Purchase and sales invoices
• Receipts for improvements
• Insurance records
• Brokerage statements
• Mutual fund statements
• Form(s) 1099 and 2439
• Other basis documentation
• Forms 1099-R, 5498, and 8606 for each year until all IRA funds have been distributed.
Records for Special Situations
Some items require specific records, in addition to the basic records of income and expenses.
• Alimony. If you pay or receive alimony, keep a copy of your written separation agreement or the divorce, separate maintenance, or support decree.
• Business use of your home. Keep records that show which part of your home is used for business and the expenses related to that use. Child care providers should also keep track of hours open for business, as well as hours spent in preparation and clean up.
• Gambling. Keep an accurate diary of winnings and losses. Required information includes:
– Date and type of gambling activity.
– Gambling establishment name and address, and names of persons present with you.
– Amount you won or lost.
• Tax credits. Each tax credit includes special record requirements. Examples include:
– Provider’s name, address, and taxpayer ID number for the Child and Dependent Care Credit.
– Physician’s certification for the Credit for the Elderly or the Disabled.
– School records for the education credits.
• Vehicle records. If you use your own car for business, medical transportation, or qualifying volunteer work, keep a mileage log that includes the date, destination, and purpose of each trip. You also need to know how many miles you drove for other purposes, such as commuting and personal use. Your vehicle records should include purchase or lease papers and loan records. You may receive a larger deduction if you keep records of gas purchases, maintenance costs, etc., in addition to mileage.
What is proof of payment?
The records you keep provide the documentation to support the deductions and expenses claimed on your tax return. You must always keep documentation of the reason for the payment. Other documents, such as statements and receipts, will help establish that the item is allowable on your tax return.
|If You Pay With||Then the Statement Must Show|
|Cash||Amount, payee name, transaction date|
|Check||Check number, amount, payee’s name, date the check was posted to your account|
|Debit or Credit Card||Amount charged, payee’s name, transaction date|
|Electronic Funds Transfer||Amount transferred, payee’s name, date, the transfer was posted to your account|
|Payroll Deduction||Amount, payee code, transaction date|
• Account statements. Account statements from your financial institution are acceptable as proof if they provide the information shown above.
• Pay statements. You may have deductible expenses withheld from your wages, such as medical insurance premiums and charitable contributions. Keep year- end or final pay statements to prove payment of these items.
• Mortgage interest. Form 1098, Mortgage Interest Statement, documents mortgage interest you paid. Be sure to verify that the amount is correct.
How Long Should You Keep Tax Records?
The IRS says you must keep your records for as long as they may be needed for the administration of any pro- vision of the Internal Revenue Code, which means you must keep records of items shown on your return until the statute of limitations for that return expires. The statute of limitations is the time during which you can amend your return, claim a credit, or be assessed additional tax by the IRS. The chart in the next column lists some general guidelines.
|Statute of Limitations|
|If you ….||Then the statute of limitations is:|
|1) Owe additional tax, and conditions 2, 3, and 4, below, don’t apply to you||3 years after the return is filed.*|
|2) Omit income that is more than 25% of gross income on your return||6 years after the return is filed.*|
|3) File a fraudulent return||Unlimited.|
|4) Do not file a return||Unlimited.|
|5) File a claim for credit or refund after filing* an original return||Later of 3 years after the return is filed, or 2 years after tax was paid.|
|6) File a claim for loss from worthless securities||7 years after the return is filed.*|
Keep records of acquisition date and cost basis for each business or investment asset until the period of limita- tions expires for the year in which you dispose of the as- set. For example, suppose you sold a piece of business equipment in 2017 and you meet condition (1) above. You must then keep records of that asset until at least April 15, 2021 (three years after the due date for your 2017 tax return).
Paper records take up a lot of space, and they can fade or be damaged. Many people prefer to keep electronic records instead of paper records. All requirements that apply to hard copy records apply to electronic records, including record retention periods. If you scan or otherwise transfer your tax records to an electronic format, you must be able to store, preserve, retrieve, and reproduce the records in a legible, readable format. Remember to back up electronic records and store in a secure location.
As always, should you have any questions or concerns regarding your tax situation please feel free to contact us.