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Tax Files: Which Ones to Throw Out, Which Ones to Keep

Now that the April tax deadline has passed, you can throw away a slew of documents. But not all of them.

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I’ve finished filing my taxes, and I’d love to clean out my files. What tax records can I toss and what do I need to keep?

See Also: Smart Steps to Get Ahead of Your 2016 Tax Return

The IRS generally has three years after the tax-filing deadline to initiate an audit, so you should keep your returns and supporting documents at least for tax years 2013 through 2015. But most tax experts recommend keeping them even longer. States may look back more than three years; Wisconsin, for example, has up to four years after the tax-filing deadline to initiate an audit. Trish Evenstad, an enrolled agent in Westby, Wis., who is authorized to represent taxpayers in front of the IRS, generally recommends keeping the supporting documents for at least five years, or longer if you own a business. The IRS has up to six years to audit anyone who neglects to report more than 25% of his or her income.

Jerry Gaddis, an enrolled agent and CEO of Tropical Tax Solutions, in Key Largo, tends to keep the records for at least 10 years. “I have a paperless office, and I try to scan all of the major documents and keep PDF copies and keep a backup,” he says. See 6 Things to Know About Going Paperless for more information.

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What to keep? Hang on to all records that show your income, deductions and credits reported on your tax return, such as W-2 forms; 1099 forms reporting interest, dividends, capital-gains distributions and other income; Form 1098, if you deducted mortgage interest; canceled checks and receipts for charitable contributions; and records showing expenses for other deductions and credits. Also keep records showing eligible expenses for withdrawals from health savings accounts or 529 college-savings plans. Keep records of any business expenses, such as equipment purchases, phone bills, business travel and marketing expenses. And if you took a home-office deduction, keep records of your rent or mortgage interest, homeowners or renters insurance, real estate taxes, utilities, and other eligible expenses. Keep receipts or checks showing any tax-deductible retirement-savings contributions, such as to a deductible IRA, Simplified Employee Pension or solo 401(k). Also keep Form 1095 showing that you had eligible health insurance coverage, or records showing that you met the criteria for an exemption. (See What to Do With the New Proof of Health Insurance Tax Form for more information.)

When you toss supporting documents (or shred them, to thwart identity thieves), don’t discard copies of your actual tax returns, or at least keep digital copies. You may need them when applying for a mortgage or disability insurance, or if you need to fix an error on your Social Security benefit statement. An old return may also provide clues if you’re trying to determine when you purchased a stock, paid taxes on reinvested dividends or contributed to a retirement-savings account. Even though you can get a copy of your return from the IRS, says Gaddis, it can be time-consuming and expensive. See How to Get a Transcript or Copy of a Prior Year Tax Return for more information.

You should also keep records establishing the basis of certain property as long as you own it, plus the three-year audit period. For example:

Keep records of your home purchase for as long as you own the home. Also keep records of any capital improvements to your home, such as the cost of adding an extension, a swimming pool, a porch, a new kitchen or anything else that increases your home’s value. These amounts can be added to the cost basis of your home when you sell, reducing any taxable gains. Up to $250,000 in home-sale profits are excluded from taxes if you’re single (up to $500,000 if you’re married filing jointly), as long as you live in your home for at least two of the five years leading up to the sale.

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Keep records of purchasing stocks, mutual funds and other investments in taxable accounts. You’ll need to report the purchase date and cost when you sell an investment so that you can establish your basis and determine your taxable gain or loss. Brokers must report the cost basis of stocks purchased in 2011 or later and of mutual funds and ETFs purchased in 2012 or later, but it helps to keep your own records in case you switch brokers. If you inherit stocks or funds, keep records of the value on the day the original owner died to help calculate the basis when you finally sell the investment. Also keep records of reinvested dividends that you’ve already paid taxes on so that you won’t be taxed on them again when you sell the stock. “I had clients go into their basement and dig out records from the ’80s and ’90s to find out what they paid for something,” says Evenstad.

Keep Form 8606 reporting nondeductible contributions to traditional IRAs. That’s so you can prove you’ve already paid taxes on the contributions and won’t be taxed on them again. Keep these records until at least three years after you withdraw all of the money from your IRAs.

Frequently overlooked tax records you should keep during the year include an account of business and charitable mileage, a receipt for charitable deductions of $250 or more, and records of out-of-pocket medical bills, says Gaddis. You can deduct medical expenses that exceed 10% of your adjusted gross income (or 7.5% if you’re 65 or older). That’s a high threshold, but you could end up qualifying if you have more medical expenses or a lower income than expected.

If you’re a snowbird, you may need to provide records that prove where you lived for more than half of the year (that’s the threshold that determines where you should pay state income taxes). See States Targeting Snowbirds Fleeing to Tax-Friendlier Climates for more information. Parents with joint custody of dependent children may also need to provide records that show with whom the children lived for most of the year. Such documents could include report cards, doctors’ bills and other records, says Gaddis.

For more information about what you should keep, see IRS Tax Topic 305 - Recordkeeping.

See Also: 10 Ways to Waste Your Tax Refund

Got a question? Ask Kim at askkim@kiplinger.com.