Has to File
Options for Paying Taxes
When it comes to tax-related documents, it is
important that you hold on to the documents for
- sources of income
- property values
- any documents that will help support claims that you have made on
previous tax returns
anything you need to get your taxes done; including 1040
forms and any accompanying tax schedules, as well as
W-2s, 1099 miscellaneous income statements and receipts
or canceled checks confirming tax-deductible expenses.
It is also important to store records for any assets
that you may eventually sell, triggering a tax bill.
There are probably going
to be additional records that will need to be kept. You
will need to use your judgment as to what is important,
and what is not. For example, if you used something for
claiming a deduction, keep it. If not, trash it. Make
sure you shred any documents with personal information
listed to avoid becoming a victim of an
A general rule of thumb
is that you should hold onto all tax documents until the
possibility for audit expires. Typically, this is three
years after you have filed. However, if the IRS believes
that you have underreported your income by 35% or more,
they have six years to perform an audit. Therefore, it
is a good idea to maintain your tax paperwork for 6 - 10
Home property records
The largest tax bill, and asset for most taxpayers
is their home. Any paperwork related to the residency
should be kept for as long as you own your home.
Before owing the IRS,
single home sellers can net capital gains of $250,000,
$500,00 for married couples. In order to calculate
whether sale profits fall within the tax-free limits,
the seller must precisely establish a residence's basis.
Documents related to a home's value -- settlement papers
and receipts for additions and
home improvements -- are very important.
**Featured article about
homeowner tax myths will further explain how
property taxes work.
Stock of investments
Investment account statements contain financial
information that a taxpayer will need as long as the
mutual fund or stock is owned. Stocks splitting may
cause a change in the worth of the holding and the
eventual value of the stock, which is used in
determining the taxable basis.
Each year, owners have to pay taxes on the earnings of
mutual funds with reinvested dividends. These taxes are
utilized to increase the funds foundation so that when
the fund is sold, the final tax bill will be less
costly. Not having statements makes it very easy to lose
track of payments, often resulting in fund owners paying
double taxes on their earnings.
Retirement saving plans
The contributions made to traditional IRAs
are usually tax-deferred. However, it is common for
already-taxed money to go into accounts. It is very
important to note on your statements whether were
tax-deferred or already taxed. Your financial reports
also keep track of the tax-deferred earnings,
compounding yearly. These records will help you in
proving your case to the IRS when its time to settle
your tax bill. Therefore, hold on to them as long as
your account is active.
Form 8606 will help you track retirement plan taxes.
This form calculates the taxable basis of an IRA only
during years which nondeductible contributions are made.
File and keep copies of each 8606 with your retirement
Small business considerations
Dealing with records can become complicating when
operating a small business; especially if you have a few
employees. The IRS typically concentrates on
self-employed entertainment and travel expenses,
analyzing returns to make sure that all expenses are
truly connected to the business and can be proven.
Therefore, you need to keep accurate and complete
records of all business related expenses until the audit
Also, it is important to keep all of your business'
financial account records forever. Similarly, any
business owner that has employees should keep all of
their employment information and related tax returns for
as long as the business is in operation.
Developing a record storing system
It does not matter how you decide to store your tax
information. The key is being organized. The IRS tends
to be more forgiving if you make an honest mistake as
opposed to being sloppy. Once you develop a system,
stick with it. We suggest keeping each year's
information in separate shoe boxes, or filing cabinets.