Concerned as to the amount of time you should keep your personal income tax records? Sometimes, taxpayers need to present these documents when the government reviews or audits a filed return or is trying to levy or collect tax. Also, these documents are required by creditors, homeowners associations, other concerned parties that have requisites to determinate before giving someone the right to use money or extending credit to obtain property and for any other transactions that these documents are deemed necessary.
Retain your income tax records indefinitely . The accompanying records, income documents and deduction source information that are supporting financial evidences, should be kept usually for six years. Generally, the time limit for the IRS to assess tax for a given tax year is three years after the tax return was due or filed where is later, except for cases of fraud or a basic understatement of income.
The IRS goes back more than three years when they determine more than 25% of gross income is not declared on a return, they consider this a substantial understatement of income, and the period for collection can be extended to six years. Also, IRS has no time limits and they can collect tax at any time when no return has been filed for a tax year. That is why it is necessary to keep your records for circumstances like these.
Hanging on to tax returns forever and other important source documents for six years should be sufficient. No one really knows when the IRS will try to go back to previous years and try to collect tax. When tax returns are filed electronically, make sure to obtain a hard copy paper version of the return from the accountant who prepared / filed your return.
Property records need to be retained until the property is sold. The tax effects of the transactions that take place this year may be affected by the purchases in the past. These purchase documents should be held on to until the property is sold. The following are some common examples:
Home was purchased in 1976 for $ 50,000. Additional $ 15,000 was incurred for renovations in 1993 and the home is sold this year for $ 200,000. To calculate the gain on the transaction, the cost information needs to be available. (eg purchase price plus renovations). In the event the IRS questions the return, the purchase and cost documents would need to be presented to the IRS. In this example, retain the records for six years after the tax return was due or filed where is later.
Some taxpayers have gains that qualify for primary home sale exclusion, which allows certain homeowners to exclude up to $ 500,000 of gain from the sale of a home. Even if this benefit applies to you, records relating to the home purchase and improvements should still be retained. The benefit may not be available in the future and it is impossible to know how much the house will be worth in the future.
There could be cases where new property will take the cost of the old property. In this case, the old property records should be kept until six years after the new property is sold. Let's say, a business car was purchased in 2010 and is now a trade in for a new business vehicle in 2015. When the new business vehicle is sold, any gain or loss is based in part, on the purchase records from the trade in vehicle . Thus, the records should be kept for six years after the tax return was due or filed where is later.
Longer record retention periods also apply to investments in shares of ownership in a small business, mutual funds, stocks, etc. In cases of these typical investments, when dividends are reinvested, every dividend reinvestment is a purchase. Thus from the year the investment is sold, the records should be kept for six years after the tax return was due or filed wherever is later.
In case of damaged and stolen properties, calculating the casualty and theft loss deduction 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 in order to support your basis. Thus, from the year of the loss, the records should be kept for six years after the tax return was due or filed wherever is later.
For married persons wherein separation or divorce becomes a potential, you should make sure that you have access to any tax documents relating to you that are being kept by your spouse. Better yet, make copies of these tax documents as access to these documents may become difficult later on. Both spouses areiable for joint returns.
Storing Record Electronically – This may also be practical and easier. The necessary period to keep electronic versions is the same for paper versions. Always back up your electronic tax records.
Damage or Loss of records – Consider keeping your most important documents in a safety deposit box. Also consider maintaining important records in a central convenient location.
Sometimes, records which are lost or damaged can be reconstructed. For example, the CPA Firm can 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 maintaining copies of the returns and source documents electronically.
Furthermore, other people / businesses, who have assisted you with purchase or sale of property, keep records. For example, you purchased mutual funds from a mutual fund company; the company can help reconstruct the costs of the mutual funds.
Anyhow, 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 whether third parties have actually kept records of the documents you need. This article is an example for purposes of illustration only and is intended as a general resource, not a recommendation. We hope this article was helpful.