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How to Keep Accurate Records For Tax Purposes in United States
We all are faced with the tedious and unpleasant task of filing taxes. This well known fact brings a question to light. What records need to be kept and exactly how should one keep these records for tax purposes. Below we will look at just those two questions that puzzle many Americans yearly.
Step 1
Keep the documents that you need
To begin, what records should one keep for their tax filing? That is a very simple question with a complex answer. Let’s begin at the beginning…
WHAT RECORDS TO KEEP FOR TAX PURPOSES HOW LONG TO KEEP AND WHY
1. Keep all taxes returns filed for 7 years- The IRS has a time frame of three years to audit your past tax returns if they suspect you made an error.
2. Keep a record of all canceled checks and/or receipts- This applies to records for the following…alimony, charitable contributions, mortgage interest and retirement plan contributions. This is important because if you notice a mistake after you have filed, you have a three year period of time that you can file an amended return.
3. Keep a record of all your deductions- There is a limit of 6 years for the IRS to challenge a return if they feel you underestimated or under reported your income by more than 24.99 percent. However, they have no limit on time if they believe you filed a fraudulent return or that you did not file a return at all
Keep records of any IRA Contributions that you have made indefinitely. This is especially important because if you made a nondeductible contribution, you may need proof you already paid tax on this money when it comes time for you to withdraw it.
4. Keep records of your retirement or savings plans depending on what record it is anywhere from a year to indefinitely. Keep the quarterly reports until years end when you receive your yearly statement. In turn you need to keep the yearly reports until you decide to close the account or you actually do retire.
5. Bank records- Examine your checks yearly. Go through and keep all canceled checks that pertain to your taxes, business expenses, home improvements and mortgage payments. Then after you have those you may shred the rest that are of no importance for future use.
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6. Bills need to be kept if it is a large purchase. Purchases such as jewelry, rugs, appliances, antiques, cars, collectibles, furniture, computers, etc. you should keep the canceled check in an insurance file for proof of their value in the event of loss or damage.
7. Keep credit card statement -between 45 days to seven years. The reason that there is a big difference is if there are tax related items on the statement you need to keep it for seven years.
8. Keep your paystubs for a year then when you receive your w-2 or your 1099 you can check and see that your income is reported correctly.
9. Keep your housing or condominium receipts- six years to permanently.
a. Keep all records documenting the purchase price and the cost of all permanent improvements -- such as remodeling, additions and installations.
b. Keep records of expenses incurred in selling and buying the property, such as legal fees and your real estate agent's commission, for six years after you sell your home. These records are important because improvements and your expenses are added to the original selling price or your cost basis. This adds up for a more profitable sale (which is also known as capital gains) when you sell the house. Therefore, you lower your capital gains tax.
There you go listed above you will find the documentation that is required to successfully file your taxes with a description of why and how long to keep the said information.
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