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RECORD KEEPING
When it comes to tax-related documents, it is important that you hold on to the documents for identifying:
   - sources of income
   - expenses
   - property values
   - any documents that will help support claims that you have made on previous tax returns

 

More specifically, 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 identity thief.

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 years.

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.

 

IRS 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 plan data.

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 threshold passes.

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.


 

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