You’ve filed your income tax return and put another year tax year behind you as you wipe the sweat from your brow. The relief that you survived a visit from the tax man is tempered by a deeply seeded sense of anxiety borne from the uncertainty of the eternal question that has plagued human kind since the dawn of time, what if!?!
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What if the IRS or my state questions my return? Cue the ominous music. Enter the shadowy figure carrying a briefcase with the letters I.R.S. emblazoned on the side. This is the stuff of nightmares, the mere possibility of the government looking askance at your return, let alone asking questions is enough to drive even the bravest soul to distraction. SmartAsset is here to help.
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Record Retention Without Becoming a Hoarder
The first thing you should know about record retention is paper is fine but digital is better. For those of you without a scanner there is no need to shell out money to buy one old fashioned paper records are perfectly acceptable. Digital records are just easier to organize and keep track of and they don’t fade with age. The IRS has accepted digital records since 1997.
The same rule applies to your actual tax returns and the related worksheets. Whether you complete your taxes on your own or have an accountant prepare them a digital copy is all you need to store. In fact many accountants are trying to go paperless and will be more than happy to supply you with a copy of your tax return on a CD rather than a printed copy.
Supporting documentation may sound like an ominous term but it really not that scary once you understand that in most cases it means receipts. For example if you install a new high efficiency furnace in your home and take the energy savers credit and the validity of the credit is questioned the supporting document is the receipt for the furnace.
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What To Keep
The general rule for what records to keep is that if it had an effect on your tax return, in the form of income or expense, keep the documents associated with it along with the tax return. On the other hand, you don’t have to keep gas and toll receipts if you are not deducting those expenses from your income (the question of deductibility is another story, entirely).
There are exceptions to the 3 year rule, and those fall into two categories, the first is for items that are depreciating over time. Assume you are depreciating the furnace you purchased over more than 3 years. You will want to keep the receipt until 3 years after the last year you took depreciation for the furnace. For example you are depreciating it over 7 years, you will want to keep the receipt for 10 years. Remember these are examples and not tax advice about what is and is not deductable.
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The second kind of receipt you will want to keep beyond three years involves investments of which stocks are a great example. When you buy shares of XYZ Corp the price you pay for them is called the basis. The basis for what you ask? The basis determines whether or not you made a profit on their sale and for how much.
An example would be if you purchased 100 shares of XYZ for $10 per share and sell them 20 years later for $12 a share you will have to pay tax on the profit of $2. unless you don’t know how much you paid for each share or if the IRS questions it and you don’t have supporting documentation (receipts) you will have to pay tax on the whole $12 per share.
The bottom line is that you should keep your records for 3 years after they last appear on your tax return. Remember there is no need to keep records that did not have any impact on your tax return, no matter how much your cousin the pack rat insists that it’s better to be safe than sorry.
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