As Tax Day approaches, many of us are left rummaging through piles of tax records and receipts. Kiplinger.com offer some advice on how to stay organized and minimize that pile of papers.
Keep your actual tax returns forever—they can help when you, say, apply for a mortgage or disability insurance or when you need clues to the value of other assets. You don’t need to keep the originals; you can scan the returns and keep a digital archive.
The IRS generally has up to three years after the tax-filing deadline to initiate an audit, so you should hold on to supporting documents for at least that long. This includes credit-card statements, canceled checks, debit-card transactions and receipts showing deductions; letters from charities reporting gifts; and paperwork re
porting mortgage interest, capital-gains distributions and income. Most people can safely shred those supporting documents three years after the tax-filing deadline, but people who are self-employed or who have a small business, income from a variety of sources or complex tax situations should keep their records longer.
Keep records showing the purchase date and price of stocks and mutual funds in taxable accounts—When you sell the investment, you’ll have to report the purchase date and price so you can establish the basis. Also keep records of reinvested dividends that you’ve already paid taxes on, so you can add them to your basis when you sell and won’t have to pay taxes on them twice. If you inherit any stocks or funds, keep records of the value on the day the original owner died, which will generally be the basis when you sell it.
Keep Form 8606 reporting nondeductible contributions to traditional IRAs—Keep Form 8606 until you withdraw all of the money from the IRAs. That way, you’ll be able to prove that you already paid taxes on the contributions and you won’t have to pay taxes on that portion of the money again when you start taking withdrawals.
Keep records of your home purchase cost and home improvements— You generally aren’t taxed on home-sales profits if you’ve lived in the home for at least two of the past five years and your profit is less than $250,000 if single or $500,000 if married filing jointly. But if you live in the home for a shorter time or have a bigger profit, you may have to pay taxes on part of your profits, and you can add the cost of major home improvements (not basic repairs) to the basis to reduce your taxable again.
·Toss pay stubs as soon as the information matches up with your W-2 for the year—You can toss monthly brokerage statements when the information matches up with your year-end report and your 1099s. You can toss most credit-card receipts that you don’t need for tax purposes after you check them against your monthly bill. And you can usually toss utility, phone and cable bills as soon as the next month’s bill arrives, unless you need them for tax purposes.