I just filed my tax return. Which records should I keep?
Joseph A. Lux, C.P.A., PLLC
April 1, 2018
Another question that I am asked on a regular basis; How long do I need to keep my tax records? “Can I throw this ‘crap’ away?”, they ask. (Is it OK to say that?) I wonder the same thing occasionally. Especially when I am looking to do some Spring cleaning. We all know that the IRS has rules for everything. Well, they have rules for record retention also. Lets take a look.
The IRS generally has up to three years after the tax-filing deadline to initiate an audit. Be sure to keep your tax returns and supporting documents at least that long. So, after April 15 this year, hang on to returns and documents for tax years 2015 through 2017. Keep copies of your W-2 forms; 1099 forms reporting interest, dividends, capital-gains distributions and other income; canceled checks and receipts for charitable donations; records showing eligible expenses for other deductions and credits (and eligible expenses for health savings account and 529 withdrawals); and other information you needed to document income or deductions shown on your tax returns.
You'll also need to keep records showing that you had minimum essential health insurance coverage or qualified for an exemption, and records of any premium subsidy you received.
I always recommend that taxpayers keep their actual tax returns forever. This is in case they ever need them when applying for a mortgage, Social Security, disability insurance, or need to track down the cost of certain assets. If you're self-employed or have a small business, or you have income from a variety of sources or a complex tax situation, keep your records longer. The IRS has up to six years to audit anyone who neglects to report more than 25% of his or her income.
And there are other documents you should keep beyond the three or six years:
Keep Form 8606 reporting nondeductible contributions to traditional IRAs until you withdraw all of the money from the IRAs. This is so you can prove that you've already paid taxes on the contributions and won't be taxed on them again.
Keep records showing the purchase date and price of stocks and mutual funds in taxable accounts. You'll have to report the purchase date and price when you sell the investment so you can establish the basis and determine the taxable gain or loss. Brokers must report the cost basis of stocks purchased in 2011 or later. But even for investments you made after then, it helps to keep your own records in case you switch brokers. If you inherit stocks or funds, keep records of the value on the day the original owner died to help calculate your basis when you finally sell them.
Keep records of reinvested dividends that you've already paid taxes on so you won't be taxed on them again when you sell the security.
Keep records of home improvements as long as you own the house. You generally aren't taxed on home-sale profits if you lived in the home for at least two of the past five years and your profit is less than $250,000 if you're single or $500,000 if married filing jointly. But if you don't live in the home that long or you have a bigger profit, you may have to pay taxes on some of your profits. You can add the cost of major home improvements (not repairs) to the basis to reduce your taxable gain. You will need records to prove the cost of these home improvements.
Ask your CPA what records you need to keep and for how long. He can help you to minimize your “Spring Cleaning” each year. Go to www.irs.gov for more information on record retention rules.