Finance Tax Time

When preparing your taxes, the goal is obviously to deduct every last penny you can. Many people are amazingly good at it. Just keep in mind you need receipts for the deductions.

List of Tax Records To Keep

Filling out and filing tax returns is really a quest to conquer the mountain. In this case, the mountain is your gross income. The IRS helpfully lets you know this by making you write it down right away and repeat it in various places on your 1040 form. How nice of them.

To conquer the mountain, you start shaving it down by claiming deductions. The more you can claim, the better off you are. Some people have lots of deductions that help in this regard. Others create lots of interesting deductions to do the same. Whatever you approach, keep in mind you need receipts to support those deductions should the IRS ask to see proof. Here is a list of common tax records you need to keep to support those deductions.

1. Mortgage Interest Payments. One of the great things about owning a home is the mortgage. Oh, wait. The great thing is the mortgage interest deduction, not the mortgage. To prove the amount you have been paying the piper, you should keep the form 1098 you receive from your lender each year. Given the fact the deduction is usually sizeable, make sure to keep it in a safe place.

2. Dependent Support. If you claim someone as a dependent, you may be in for a surprise. You need to be able to prove that you provide more than 50 percent of the support for that person. Happily married parents usually do not have problems, but the IRS likes to zing divorced parents on this issue. Keep records in the forms of receipts, checks and invoices in such a situation.

3. Home Repair Receipts. No, you do not have to show the receipts each year. The issue really comes up when you decide to sell your home. To cut your tax bill, you should claim all repairs and improvements you made since owning the home. Guess what, you need receipts to support those claims. In simple terms, save every receipt related to your home or risk losing the deductions.

4. Medical Expenses. Health care costs are out of control as we all know. If you are claiming deductions related to medical care, keep those receipts and bills.

Obviously, there are other areas where you need to keep receipts, but these are some of the more common places where people fall down on the job. In general, you should keep all the receipts for three years, but I suggest doubling that number. With home repair or improvement expenses, you need to keep them for five years after you get around to selling your home.

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Many taxpayers are confused about how long they should keep
tax records. The term “tax records” refers to your tax
returns and the documents that support the information in
the returns. These documents can include receipts, bank
statements, 1099s, etc. If you are one of the unlucky few to
be audited, these records will be vital to fending off the
IRS.

Tax Returns

To protect yourself from a nasty audit, you should keep all
of your tax returns indefinitely. The IRS has been known to
lose or misplace tax returns. While conspiracy advocates
argue that this is evidence of a nefarious scheme, the
simple fact is that the IRS receives millions of returns
over a three-month period and lost returns are inevitable.
So how do you protect yourself? You keep copies of every
single tax return.

A quick word on the IRS e-file program. If you file your
returns electronically, make sure you get copies from the
company that filed your return. All such entities are
required by law to provide you with paper copies.

Records Supporting Tax Returns

You should keep supporting tax records for a period of six
years from the date the returns were actually filed. In
general the IRS only has three years to audit you from the
filing date. For example, if you filed your 2000 tax return
on April 15, 2001, the IRS would have to start an audit by
April 15, 2004. Keep in mind that if you filed an extension,
the IRS will have three years from the date you submitted
the return. As is always case with taxes, there are
exceptions to this general time period.

If your tax return looks like the great American novel, the
running of the three-year audit period may not save you.
Failure to report more than 25% of your gross income gives
the IRS an additional three years to pursue you. Using the
previous example, the IRS would have until April 15, 2007 to
audit your 2000 tax return.

Property Records - Get A Filing Cabinet

You may need to get a filing cabinet if you hold property
for an extended period of time. For example, assume that you
purchased a home in 1980 for $100,000 and made $50,000 in
improvements over the years. You need to keep the purchase
records, mortgage statements and receipts that relate to the
improvements. When you sell the home, you will need the
records to determine the tax consequences of the sale, to
wit, your basis (original cost plus improvements) and
profit. If the IRS decides to take a closer look at the
reported profit, you will need to provide your tax records
to support your claims. Once you actually sell the property,
it is recommended that you keep all of the tax records for
an additional six years.

Divorce

Make sure you keep copies of all of your financial
documents, tax returns and supporting documents if you get
divorced. You should also keep copies of all divorce
agreements and court orders that cover property and
financial issues. When couples divorce, the tax and credit
consequences can be nightmarish. If you don’t keep records,
you will have to ask your ex-spouse for them. Get the
records now to avoid doubling your misery!

Hopefully, you will never need to show your tax records to
the IRS. If you are one of the unlucky few that is audited,
your tax records should keep your feet out of the fire.

Richard A. Chapo is with BusinessTaxRecovery.com - providing information on taxes. Visit us to read more articles about tax returns and our new tax help page.

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QUESTION:

How long should I keep my tax returns?

ANSWER:

One of the questions I am asked most often, both as an accountant and as a tax preparer, is how long should you hold on to records and files, receipts and bills, and the like.

First of all, it is my belief that you should keep the paper copy of your tax returns (Form 1040 or 1040A plus all supporting Schedules and Forms) forever! This provides a permanent record of your financial history. You never know when the information on a prior year’s tax return will come in handy for a variety of tax or financial related reasons, or just to satisfy personal curiosity.

The time period for keeping all other records ties in to the fact that the IRS, and the appropriate state tax authorities, has three (3) years from the due date (or filing date if you had any extensions) of a tax return to audit that return (except in the case of tax fraud - then the IRS can go back forever). If you filed your 2002 Form 1040 by the initial April 15, 2003 due date, “Uncle Sam” has until April 17, 2006 to audit it and ask for additional taxes.

I recommend keeping all back-up documentation that supports an item reported or deducted on your tax return for four (4) full years. This includes all applicable bank statements and cancelled checks as well as W-2s, 1099s, 1098s, and appropriate receipts and bills. You can toss all such information for your 2002 tax return in December of 2006.

Hold on to your individual pay stubs for the year until you have received the Form W-2 for that year. Reconcile the year-to-date cumulative totals on the last pay stub for the year to the amounts reported on the W-2. If they match you can throw out all but the last pay stub. Keep the final pay stub for the year, with year-end cumulative numbers, with your tax return documentation for that year.

Certain documentation requires longer holding periods. For investments in stock, bonds and mutual funds you should keep all confirms and other appropriate back-up, such as notices of splits and records of any dividend reinvestments, for as long as you hold the investment plus four (4) additional years. You should keep the confirmation slip or other documentation for the sale or disposition of the investment for four (4) years after the sale or disposition.

Similarly, if you own real estate you should keep all Closing or Settlement Statements for the purchase and refinancing of the property, and documentation of any capital improvements, for as long as you own the property plus four (4) additional years. You should keep the Closing or Settlement Statement or other documentation for the sale or disposition of the property for four (4) years after the sale or disposition.

If you have invested in a limited partnership or “sub-chapter S” corporation, or are a partner in a business organized as a partnership, a “sub-chapter S” corporation or an LLC or LLP, you should keep the annual Form K-1 you receive from the investment or business for as long as you own an interest in the entity plus four (4) additional years, and keep any paperwork related to the sale or disposition of your interest for four (4) years after the sale or disposition.

Receipts and bills for personal expenses that are not related to any items reported or deducted on your tax return can generally be tossed after one year. Throw out all such bills for calendar year 2004 in January of 2006. You may want to keep bills, receipts and cancelled checks for equipment, applicance and the like for at least as long as these items are covered under warranty.

Do you have a question you would like to Ask The Tax Pro? Go to http://rdftaxpro.tripod.com/taxhelp.

Robert D Flach is a tax professional with 34 tax seasons of experience preparing 1040s for individuals in all walks of life. He writes and publishes the free monthly online newsletter STUFF AND SUCH (http://rdftaxpro.tripod.com/stuffandsuch) and several other websites, as well as several print newsletters and reports on tax planning and preparation. For more information on his websites go to http://rdftaxpro.tripod.com/websites.

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