What, When And Why Keep Your Tax Documents

The new tax bill may allow for non-itemized deductions and, thus, less paper to keep but it’s always best to keep tax-related records.  The paperless movement, unfortunately, has to be kept at bay for the meantime since the Internal Revenue Service (IRS) has strict rules regarding pertinent paper document filing.  

Here are important things that you should know about what documents to keep, when to keep them (i.e., duration), and why keep them in the first place. You will find that your meticulous recordkeeping will work to your benefit – and the benefit of your tax preparer at Jackson Hewitt, for that matter – both now and in the future.   

Be Mindful of the IRS Instructions

The IRS requires taxpayers to keep their tax returns and all supporting documents, such as receipts, for three years after filing them. Think about it this way: What you keep in storage now may seem unnecessary but an IRS auditor may need it in the future and you don’t want to be caught unprepared.   

But there’s more to the 3-year rule. If you neglected to report income, which was more than 25% of the gross income reported for the pertinent tax year, then you have to keep the pertinent documents for six years from the date on which it should have been reported. If you also neglected to file a tax return in a certain year, you have to keep the records until the day you die.  

The bottom line: Keep your tax-related records ad infinitum if you made mistakes on your tax return, or you intentionally filed a fraudulent return, or if you want to contest your tax. You should be able to reconstruct your tax return from scratch from the supporting documents alone.  

Keep Your Investments Records

Capital gains and losses are troublesome for people who have taxable brokerage accounts, especially when switching brokerage firms.  You should check that the transfer between your old and new brokerage firms, usually done electronically, has been made; check for it within a couple of months, just to be sure.  

While you can depend on the brokerage firm for record keeping purposes, you should still keep documents related to your investments’ cost basis information. Think of it as backup just in case the taxman comes a-calling and you need to show proof of your tax-related decisions. You have several ways of making backup files:

  • Store all your e-trading notifications and emails into a single file
  • Scan the most important paper statements and all year-end summaries of all transactions before storing them into a single file
  • Store all files in a cloud account just to be on the safe side

These recommendations also apply to your deductible expenses, credit card purchases, health savings accounts, major insurance policies, home improvement receipts, and estate planning documents. You may yet find a reason for being an organized pack rat!  

Leave a Reply

Your email address will not be published. Required fields are marked *