Tax Preparation Records to Keep
If you're a taxpayer with a complicated federal tax return, your tax preparation will invariably unearth a massive amount of receipts, worksheets, schedules and instructions you'll need to complete the return. The IRS recommends that taxpayers keep organized records during the year; it will make it easier to complete your return come April 15.
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Income Records
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As far as the IRS is concerned, reporting your income is your most important duty as a taxpayer. During the calendar year, you may receive taxable income from many sources. Keep canceled checks for any alimony you receive; it is taxable income, as are unemployment insurance benefits paid to you during the year. If you're self-employed, keep a ledger of income received from your business throughout the year. Employees will receive Form W-2, which documents income; you must have a record of your earnings and taxes withheld. Keep a record of any state tax refund you received from the prior year if you itemized your deductions. Social Security earnings may be taxable; keep Form SSA-1099, which details the amount of income you received in the year. Landlords should keep records of income received from tenants. Bank statements are also beneficial when calculating your income for the year, as are IRA records; file monthly or quarterly statements you receive from your financial institutions until you receive an end-of-year summary of your income or deposits.
Expense Records
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Receipts are important to the taxpayer; calculated together, they form the basis for many allowable tax deductions. Save canceled checks or bills that relate directly to tax deductions; for instance, medical expenses and charitable contributions. Organize paper receipts; in any given year, you may keep hundreds. They can be time-consuming to go through, but they may pay off in a reduction on your taxes. If you own your own small business, keep records of your home office expenses, invoices you paid for materials or equipment and business automobile deductions.
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Home or Property-Related
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Homeowners and property investors are often laden with paperwork they need for preparing returns. Keep mortgage interest statements, property tax records, insurance policies, maintenance records and receipts along with your original mortgage papers or notes to help calculate your home's depreciation deduction. Keep copies of home improvement expenses to reduce your capital gains tax if you sell the home for more than you paid for it.
After You File
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Keep tax returns along with all the records you used to compile your returns for a minimum of three years, or seven years if your tax returns are typically complex. The IRS can audit your returns for up to three years, six years if you failed to report income. If your return is flagged and found to be fraudulent, there is no limit to the length of time you may be audited.
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References
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