Barber, Banaszynski & Hiatt, PSC

How long should you keep tax records?
posted by Thomas J. Banaszynski
Tags: In the news 

Not all financial records need to be kept forever. There are some guidelines for how long one should keep financial records,

Taxes: Tax returns and records for tax deductions should normally be kept for seven (7) years. The IRS has three (3) years from the date you actually file your tax return to audit your tax return if it suspects good-faith errors. Most people file their tax return by April 15; however, if your return is filed at a later date, e.g. August 15, the IRS has three (3) years from that August 15 filing date to audit your return for good-faith errors. The three (3) year timeline also provides if you find an error, and need to file an amended tax return.

The IRS has six (6) years to audit and challenge your tax return if it thinks you under reported your gross income by twenty-five percent (25%) or more. There is no timeline if an individual has filed a fraudulent return.

Retirement and Saving Plan Records: Records of your contributions, including any employer match, to a 403(d) account or a 401(k) account or an IRA account should be kept at least one (1) year, or until you file your current year’s tax return. Quarterly statements for your retirement account should be retained until you receive the annual report. If the information on the annual report accurately matches up with the periodic statements, shred the quarterly statements. The annual summaries should be kept at least until you file your tax return. Some advisors suggest that you keep the annual statements permanently, or until you retire. That can be an individual decision. When funds are withdrawn from your retirement account, they will be taxed as ordinary income if you had a tax deduction for the contribution to the retirement account.

If you make a non-deductible contribution to an IRA or Roth IRA, keep your records indefinitely. You need to be able to prove that you paid taxes on the contributed money when the time comes to make a withdrawal.

Brokerage Statements: If you have accounts that are not retirement accounts, retain the records of your purchases of stocks or securities or bonds until you sell the securities. This information will be necessary to determine, and prove, whether you have capital gains or capital losses at tax time. Your brokerage may also provide this information to you. Once you have completed your tax returns, related to capital gains and losses, destroy the other records.

Bank Records: Bank records should typically be kept for at least one (1) year, or until you file your annual tax return. Once you have filed your return, go through your cancelled checks, if you still receive cancelled checks from the bank or financial institution. Save those checks that relate to your payment of taxes; business expenses; home improvements; mortgage payments. Shred any checks that have no long-term significance. If your financial institution only provides pictures of your checks, keep those statements that reflect the payments having that long-term significance.

Bills, Credit Card Receipts and Statements: Typically these records should be destroyed as payments are made, and you receive a record of those payments having been made. However, payments or purchases for “big ticket” items should be kept permanently, or until you dispose of the item. These purchases might include things such as jewelry, antique rugs, appliances, antiques, cars, collectibles, furniture, computers, etc. These should be kept in an insurance file for proof of their value in the event of a loss or damage. You will also need a record to show the price you paid if you have a capital gain or loss of the sale or disposition of the item or items.

House and Condominium Records: These records should be kept for at least six (6) years, and maybe forever, or until you dispose of the property. Keep all records which document the purchase price, which would include for things such as legal fees and real estate agent’s commission. Keep all records of permanent improvements. These would include such items as remodeling expenses, additions, permanent installations, e.g. roof, furnace, air conditioning, etc. It is important to keep these records. Any improvements which you make on your house, as well as the expenses in selling it, are added to the original purchase price of the residence. This can reduce any potential capital gains on the sale of the real estate and allow you to receive a greater profit.

An individual taxpayer can exclude up to $250,000.00 of gain ($500,000.00 for married taxpayers filing jointly) from the sale of a home owned and used by the tax payer as a principal residence for at least two (2) of the five (5) years before the sale. A surviving spouse will qualify for the up to the $500,000.00 capital gain exclusion if the sale occurs not later than two (2) years after the other spouse’s death, if other requirements for the $500,000.00 exclusion were met immediately before this spouse’s death; and the surviving spouse is not remarried as of the date of the sale.

Hopefully the foregoing offers you some insight on how long you should retain your records. When in doubt, especially as related to tax documents or supporting documentation, keep the records for at least seven (7) years, or indefinitely. If you have questions, consult a competent financial advisor.