Worried about the amount of time to keep your personal income tax records? Sometimes taxpayers are required to submit these documents when the government reviews or audits a filed return or is trying to levy or collect taxes. In addition, these documents are required by creditors, homeowners associations, other interested parties who have requirements to determine before granting someone the right to use money or extend credit to obtain property and for any other transaction that these documents are deemed necessary.
Keep your income tax records indefinitely. Attached records, income documents, and deduction source information supporting financial evidence should normally be kept for six years. Generally, the time limit for the IRS to assess taxes for a given tax year is three years after the due date or tax return filing, whichever is later, except in cases of fraud or an understatement. substantial income.
The IRS goes back more than three years when it determines that more than 25% of gross income is not reported on a return, they consider this to be a substantial understatement of income and the collection period can be extended to six years. Also, the IRS has no time limits and can collect taxes at any time when a return has not been filed for a tax year. That is why it is necessary to keep your records for circumstances like these.
Holding onto tax returns forever and other important source documents for six years should be enough. No one really knows when the IRS will try to go back to previous years and try to collect taxes. When tax returns are filed electronically, be sure to obtain a paper copy of the return from the accountant who prepared / filed your return.
Property records must be kept until the property is sold. The tax effects of transactions that take place this year may be affected by purchases in the past. These purchase documents must be kept until the property is sold. The following are some common examples:
The home was purchased in 1976 for $ 50,000. An additional $ 15,000 was incurred for renovations in 1993 and the home is selling this year for $ 200,000. To calculate the profit from the transaction, the cost information must be available. (for example, purchase price plus renewals). In the event the return is disputed by the IRS, the purchase and cost documents must be submitted to the IRS. In this example, keep the records for six years after the due date or tax return filing, whichever is later.
Some taxpayers have earnings that qualify for the exclusion from the sale of a main home, allowing certain homeowners to exclude up to $ 500,000 of profit from the sale of a home. Even if this benefit applies to you, records related to the home purchase and improvements must be kept. The benefit may not be available in the future and it is impossible to know how much the home will be worth in the future.
There may be cases where the new property takes over the cost of the old property. In this case, the old property records must be kept for up to six years after the sale of the new property. Let’s say a commercial car was purchased in 2010 and is now traded in for a new commercial vehicle in 2015. When the new commercial vehicle is sold, any gains or losses are based in part on the records of the purchase of the marketed vehicle. Therefore, the records must be kept for six years after the due date or the filing of the tax return, whichever is later.
Longer record retention periods also apply to investments in small business owned stocks, mutual funds, stocks, etc. For these typical investments, when dividends are reinvested, each dividend reinvestment is a purchase. Therefore, beginning in the year the investment is sold, records must be kept for six years after the due date or tax return filing, whichever is later.
For damaged or stolen property, the casualty and theft loss deduction calculation is determined, in part, by the cost of the property that was damaged or stolen. Having the records that support the cost of these properties is important to support your foundation. Therefore, beginning in the year of loss, records must be kept for six years after the due date or tax return filing, whichever is later.
For married people in whom separation or divorce becomes a potential, you should ensure that you have access to any tax documents related to you that are in the possession of your spouse. Better yet, make copies of these tax documents, as accessing these documents may be difficult later on. Both spouses are responsible for joint returns.
Electronic record storage – This can also be practical and simpler. The period for keeping the electronic versions is the same for the paper versions. Always make a backup copy of your electronic tax records.
Damage or loss of records – Consider keeping your most important documents in a safe deposit box. Also consider keeping important records in a convenient central location.
Sometimes lost or damaged records can be rebuilt. For example, the CPA firm may provide copies of these damaged documents, as they are required by law to keep copies of tax returns for a period of three years. We recommend keeping copies of original statements and documents in electronic format.
Also, other people / companies who have helped you with the purchase or sale of properties keep records. For example, you bought mutual funds from a mutual fund company; the company can help rebuild mutual fund costs.
However, it is still the safest course of action to keep copies of the documents yourself in the safest place possible, as you can never be sure that third parties have kept records of the documents you need. This article is an example for illustrative purposes only and is intended to be a general resource, not a recommendation. We hope this article has been useful to you.
