How many shoe boxes full of receipts do you have? How many year’s worth are up in that closet, or would you rather not think about it? The question for many people about record retention, for themselves or for the family, is how long do I possibly need to save all that stuff? One year? Three? 10?? There is currently a fire hazard waiting to happen. I personally do not like a lot of stuff laying around and like to throw away everything as quickly as possible, but we don’t want to live in fear of an audit happening someday, we want to be prepared. So, here is a summary of this handy IRS guide for record keeping specifically for individuals. Read about recordkeeping for businesses in our next blog.
Let’s first start with the whys behind record keeping:
- Need to organize all income sources: if you have income from multiple sources, it needs to be separated, business from non-business and taxable from nontaxable.
- Want to remember all your expenses: it’s best to write these down as they happen otherwise if you’re me, you’ll forget a lot of them and miss out on those tax savings! This will also help you determine if you can itemize on your tax return.
- Remember the original cost of your property: also called the cost basis of your property, keep record of what you originally paid for your home and other properties, plus any improvements you make.
- Need records to easily prepare tax return: unless you enjoy a nice juicy month-long migraine every year!
- Need to avoid a bad audit: those same records are needed to prove what you put on your tax return in case Mr. Auditor decides to pay you a visit.
How to organize these piles of records
There isn’t a right or wrong way to organize, just keep it simple and easy to find things if they ever need to be found. Create a system that works for you. Start by organizing by year, and income type/expense, like if you can write of your car usage, it might be helpful to keep those gas receipts in their own pile. Of course, we are in the digital world, so there are of course software programs to scan and keep your records in as well. But make sure this is backed up once or twice and it doesn’t hurt to keep any paper copies of documents you do have. It’s also good practice to keep past tax returns, for help with next year’s tax return prep, and in case you need to file an amended return.
Here is a table from the IRS publication breaking down some very basic forms you need to keep:
- Income: Form(s) W-2, Form(s) 1099, bank statements, brokerage statements, Form(s) K-1
- Expenses: sales slips, invoices, receipts, canceled checks and other proof of payment
- Home: closing statements, purchase and sales invoices, proof of payment, insurance records
- Investments: brokerage statements, mutual fund statements, Form(s) 1099, Form(s) 2439
Proof of payment
You must be able to prove you paid for certain items. The following table is a guide on what types of proof you need based off the form of payment you used.
- Cash: amount, payee’s name, transaction date
- Check: amount, payee’s name, check number, date check was posted to the account by the bank/financial institution
- Debit or credit card: amount charged, payee’s name, transaction date
- Electronic funds transfer: amount transferred, payee’s name, date transfer was posted to the account by the bank/financial institution
- Payroll deduction: amount, payee code, transaction date
Specific Record Keeping Examples
Here is a list of example types of records you may need to keep for a period of time based on your situation. For more details consult this IRS publication.
- Business use of home
- Losses from casualty and theft
- Child care credit
- Charitable contributions
- Elderly or Disabled tax credit
- Education expenses
- Employee business expenses
- Gambling winnings and losses
- HSA and MSA (health savings)
- Medical and dental expenses
- Mortgage interest
- Moving expenses
- Pensions and annuities
That’s a lot of records, no wonder there are piles of shoe boxes in my closet! Here is a table that helps you decide what should stay a bit longer, and what can help you roast some marshmallows this summer:
|Your situation||Keep records for…|
|1. Owe more tax and #2, 3, and 4 do not apply||3 years|
|2. Do not report income that you should and it’s more than 25% of the gross income shown on your return||6 years|
|3. File a fraudulent return||No limit|
|4. Do not file a return||No limit|
|5. File a claim for credit or refund after you filed your return||3 years|
|6. File a claim for a loss from worthless securities||7 years|