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Financial Planning / Tax Strategies
|Subject: Tax Paperwork to Keep||Date: 5/7/2004 4:00 PM|
|Author: TMFTwitty||Number: 71764 of 121101|
Tax Paperwork to Keep
By Roy Lewis (TMF Taxes)
May 7, 2004
So you've completed your tax return, and you find that you have enough records to fill a large dump truck and a small wheelbarrow. Now what? How long do you have to hang on to all this stuff?
Unless fraud, evasion, or a substantial understatement of income is involved in your tax return, Uncle Sam generally has only three years in which to tap you on the shoulder and ask for the underlying documents necessary to support information reported in your tax return.
Remember, unlike the common "innocent until proven guilty" principle, you must prove the validity of your tax return. You have to sweat out three years before you can rest easy that your return hasn't been selected for audit. Usually that countdown period begins on the later of the date that the tax return is required to be filed (usually April 15) or the date that the tax return was actually filed.
How long you have to keep your paperwork depends directly on the statute of limitations, but here are some guidelines:
Your copy of the tax return: Keep it forever
That's right. You never want to dispose of your copy. You never know when this document will come in handy. Remember that in many cases, the IRS destroys the original returns after four or five years. It's always best to have your copy to fall back on.
Cancelled checks, deposit statements, and receipts: Keep for at least three years
Because of various combinations of the statute of limitations and technical carry-back and carry-forward provisions in the code, though, keeping them for longer than three years is preferred. (Five years is better, and seven years is best.) But make sure that these cancelled checks and receipts are only for transactions that have an impact on this single year only, such as receipts for your itemized deductions or interest income.
In other words, if a receipt is for something that won't appear on your tax return for several years (such as home improvements), then you'll want to hang on to it for at least three to seven years beyond when it appears on your return.
Stock trade confirmation receipts/statements: Keep for at least three years after sale
Again, five or seven years is even better. For example, say that you bought 200 shares of Whoa Nellie Brake Co. (ticker: HALT) stock in 1983 and sold them in 2003. You'll want to hold on to both the buy and sell confirmations until at least April 2007. In effect, you will have held on to the 1983 purchase statement for a quarter century -- but that's what's required in order to prove both ends of a stock transaction.
Improvements to property: Keep at least three years after sale
Keep proof of those improvements in order to prove your basis in the property when it is sold. This is true for rental property, investment property, and even your personal residence. Remember when you put that new roof on your rental property in 1987? Well, you'd better still have that receipt -- and keep it with receipts for the other improvements to that property for at least three years after you sell it.
In cases like this, it is very possible that you'll have records for 10, 20, 25 years or longer. And again, five or seven years beyond the sale date is even better.
Many folks will tell you that keeping cost basis records on your personal residence is no longer required because of the new gain exclusion rules on the sale of a principal residence. Don't believe them. While, under the current laws, those records might be moot when you final sell your principal residence, remember that Uncle Sam can always change the rules in the future.
If you've owned your principal residence for a number of years, and then the rules are changed so that you'll need to prove your basis in order to avoid some taxes on the sale, you'll be one sorry soul if you decided to pitch all of those records way back then because you thought you would never need them. When dealing with tax issues, safe is always better than sorry.
Escrow closing documents: Keep at least three years after sale
You'll want to retain both the purchase escrow and sales escrow statements. Much like your stock confirmation statements, you'll need to show both sides of the transaction and be able to prove your improvements. The key is to think before you throw anything out.
This listing is not all-inclusive; there may be aspects that are specific to your individual tax issues that aren't discussed here. But these will give you the highlights of the most important issues.
The easy answer, Fools? Keep everything. Throw out nothing. Spend your kids' inheritance on storage space.
Roy Lewis lives in a trailer down by the river and is a motivational speaker when not dealing with tax issues, and he understands that The Motley Fool is all about investors writing for investors. You can take a look at the stocks Roy owns as long as you promise not to ask him which stock to buy. He'll be glad to help you compute your gain or loss when you finally sell a stock, though.
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