Investment Strategies

What pieces of paper do I need to keep in order to do my taxes?

Keep detailed records of your income, expenses, and other information you report on your tax return. A good set of records can help you save money when you do your taxes and will be your trusty ally in case you are audited.

There are several types of records that you should keep. Most experts believe it's wise to keep most types of records for at least seven years, and some you should keep indefinitely.

What type of records do I need to keep?

Keep records of all your current year income and deductible expenses. These are the records that an auditor will ask for if the IRS selects you for an audit.

Here's a list of the kinds of tax records and receipts to keep that relate to your current year income and deductions:

• Income (wages, interest/dividends, etc.)
• Exemptions (cost of consulting)
• Medical expenses
• Taxes
• Interest
• Charitable contributions
• Child care
• Business expenses
• Professional and union dues
• Uniforms and job supplies
• Education, if it is deductible for income taxes
• Automobile, if you use your automobile for deductible activities, such as business or charity
• Travel, if you travel for business and are able to deduct the costs on your tax return

While you're storing your current year's income and expense records, be sure to keep your bank account and loan records too, even though you don't report them on your tax return. If the IRS believes you've underreported your taxable income because your lifestyle appears to be more comfortable than your taxable income would allow, having these loan and bank records may be just the thing to save you.

How long should I keep these records?

Keep the records of your current year's income and expenses for as long as you may be called upon to prove the income or deduction if you're audited.

For federal tax purposes, this is generally three years from the date you file your return (or the date it's due, if that's later), or two years from the date you actually pay the tax that's due, if the date you pay the tax is later than the due date. IRS requirements for record keeping are as follows:

• You owe additional tax and situations (2), (3), and (4), below, do not apply to you; keep records for 3 years.
• You do not report income that you should report, and it is more than 25 percent of the gross income shown on your return; keep records for 6 years.
• You file a fraudulent return; keep records indefinitely.
• You do not file a return; keep records indefinitely.
• You file a claim for credit or refund* after you file your return; keep records for 3 years from the date you filed your original return or 2 years from the date you paid the tax, whichever is later.
• You file a claim for a loss from worthless securities or bad debt deduction; keep records for 7 years.
• Keep all employment tax records for at least 4 years after the date that the tax becomes due or is paid, whichever is later.

Should I keep my old tax returns? If so, for how long?

Yes, keep your old tax returns.

One of the benefits of keeping your tax returns from year to year is that you can look at last year's return while preparing this year's. It's a handy reference and reminds you of deductions you may have forgotten.

Another reason to keep your old tax returns is that there may be information in an old return that you need later.

Audits and your old tax returns

Here's a reason to keep your old returns that may surprise you. If the IRS calls you in for an audit, the examiner will more than likely ask you to bring your tax returns for the last few years. You'd think the IRS would have them handy, but that's not the way it works. Your old returns are more than likely in a computer, in a storage area, or on microfilm somewhere. Usually, your IRS auditor has just a report detailing the reason the computer picked your return for the audit. So having your old returns allows you to easily comply with your auditor's request.

How long should I keep my old tax returns?

You may want to keep your old returns forever, especially if they contain information such as the tax basis of your house. Probably, though, keeping them for the previous three or four years is sufficient.

If you throw out an old return that you find you need, you can get a copy of your most recent returns (usually the last six years) from the IRS. Ask the IRS to send you Form 4506, Request for Copy or Transcript of Tax Form. When you complete the form, send it, with the required small fee, to the IRS Service Center where you filed your return.

What other types of tax records should I keep?

You need to keep some other types of tax records and receipts because they tell you how much you paid for something that you may later sell.

Keep the following types of records:

• Records of capital assets, such as coin and antique collections, jewelry, stocks, and bonds.

• Records regarding the purchase and improvements to your home.

• Records regarding the purchase, maintenance, and improvements to your rental or investment property.

How long should I keep these records? You need to keep these records as long as you own the item so you can prove the cost you use to figure your gain or loss when you sell the item.

Are there any non-tax records I should keep?

There are other records you should keep, even though they don't appear to have any use for your tax returns. Here are a few examples:

• Insurance policies, to show whether you were to be reimbursed in case you suffer a casualty or theft loss, have medical expenses, or have certain business losses.

• Records of major purchases, in case you suffer a casualty or theft loss, contribute something of value to a charity, or sell it.

• Family records, such as marriage licenses, birth certificates, adoption papers, divorce agreements, in case you need to prove change in filing status or dependency exemption claims.

• Certain records that give a history of your health and any medical procedures, in case you need to prove that a certain medical expense was necessary.

• These categories are the most universal and should cover most of your recordkeeping needs. Everyone's needs are unique, however, and there may be other records that are important to you. Skimming through our Tax Library Index might highlight other categories that apply to you.

What kind of recordkeeping system do I need?

Unless you own or operate your own business, partnership, or S corporation, recordkeeping does not have to be fancy.

Your recordkeeping system can be as casual as storing receipts in a box until the end of the year, then transferring the records, along with a copy of the tax return you file, to an envelope or file folder for longer storage.

To make it easy on yourself, you might want to separate your records and receipts into categories, and file them in labeled envelopes or folders. It's also helpful to keep each year's records separate and clearly labeled.

If you have your own business, or if you're a partner in a partnership or an S corporation shareholder, you might find it valuable to hire a bookkeeper or accountant.

Do you contribute to charity?

If you donate to a charity, you must have receipts to prove your donation.

Staeting in 2007, contributions in cash or check aren't deductible-at all-unless substantiated by one of the following:

1. A bank record that shows the name of the qualified organization, the date of the contribution, and the amount of the contribution. Bank records may include: a canceled check, a bank or credit union statement or a credit card statement.
2. A receipt (or letter or other written communication) from the qualified organization showing the name of the organization, the date of the contribution, and the amount of the contribution.
3. Payroll deduction records. The payroll records must include a pay stub, Form W-2 or other document furnished by the employer that shows the date and the amount of the contribution, and a pledge card or other document prepared by or for the qualified organization that shows the name of the organization.

Besides deducting your cash and non-cash charitable donations, you can also deduct your mileage to and from charity work. If you deduct mileage for your charitable efforts, keep detailed records of how you figured your deduction.

Are you employed by someone else?

If you work for someone else and spend your own money on company business, keep good records of your business expense receipts. You will need these records to either get a reimbursement from your employer or to prove business-related deductions that you take on your taxes.

Do you have income from tips?

If you make tips from your job, the hand of the IRS reaches here too, and if you are ever audited, the IRS will be interested in records of how much you made in tips.

Do you own property?

If you own property, be particularly careful to keep receipts or some other proof of all your expenses, especially for repairs and improvements.

Do you hire domestic workers?

It's important to keep accurate information about who works for you, including nannies and housekeepers, when and where they worked for you, and how much you paid them for the work.

Do you have a business?

If you have a business, you must keep very careful records of all your business expenses, including vehicle mileage, entertainment expenses, and travel expenses.

If you have a business, just because you have cash in your pocket doesn't mean you're in the black on the books. Keeping up-to-date records of all transactions and costs will not only help you tax wise, it will tell you if your business is actually profitable.

Do you travel for your business?

If you travel for business, keep good receipts and logs of all your travel expenses, including those for meals and entertainment. You will need this information whether you work for yourself or for someone else.