For those who are stressed about taxes, records, returns, and other related documents, you can find solace in the fact that you are not alone. There is much confusion related to taxes and especially how to appropriately organize, file, and keep important documents. Thankfully, though, it can be simple and easy if you know what you’re doing. Let’s investigate some typical questions and provide clarity on these issues.
How Long Do I Need to Keep Tax Records and Tax Returns?
The question regarding how long to keep tax records is so popular that the IRS dedicates an entire webpage to the issue. According to IRS.gov, “The length of time you should keep a document depends on the action, expense, or event the document records.” In general terms, this means keeping the appropriate documentation until the period of limitations for that item of income or deduction runs out. This is the time period in which the IRS can assess additional tax and you are able to amend your returns.
While every situation is unique, there are some general circumstances under which you definitely need to keep your tax returns. These include the following:
- When you owe additional taxes, it’s a good idea to keep records for three years.
- When you don’t report income that should have been reported – and it accounts for 25% of your gross income – you should keep records for six years.
- If you file a fraudulent return, records should be kept indefinitely.
- If you fail to file a return, records should be kept indefinitely.
- Records regarding a filed claim for a loss on worthless securities or bad debt deduction should be kept for seven years.
- All employment tax records should be kept for at least four years after the tax is paid or due (whichever is later).
- When filing for a credit or refund after filing your initial return, you should keep records for three years after you filed the original return.
As a general rule of thumb, always ask yourself whether the documentation you are considering throwing away is connected to your assets or tax returns in any way. If it could be used to explain tax debt or liability, it should be saved until the appropriate statute of limitations expires.
Are There Any Tips for Organizing Past Tax Records?
People often ask about the best way to store, file, and organize old tax records. While it is completely up to you, there are some proven ways to stay on top of everything. First, it’s ideal to keep physical paper documents in a safe, dry place that cannot be contaminated by water. Each tax return should be put in a separate envelope or folder for best keeping.
It’s also a good idea to go digital over time. One of the best ways to do this is by scanning old documents as you go and shredding the paper records. Start by scanning this year’s records and the oldest return you have. Do this each year and you won’t have to spend a large amount of time on the project.
A third tip is to keep two copies of important documents. These are documents that will be kept indefinitely, such as closing documents, investment transactions, insurance claims, retirement documents, and more. Put each copy in a separate location to avoid accidents.
What’s the Best Way to Prepare for Tax Time?
While dealing with past records and files is important, it’s necessary to stay organized with current records and files in preparation for tax time. Start by marking important dates on your calendar so major milestones and deadlines don’t pass you by.
Whether you prefer to keep files electronically or physically, you should pick an organization system and stick to it. Having a strict method and filing process for everything you do will ease the burden associated with tax time.
It’s also crucial you stay up to date on ever-changing tax laws. This will help you adjust as needed and ensure you aren’t left in a position detrimental to your finances. One of the best ways to do this is by using the services of a tax professional.
Regardless of the tax bracket you are in, a tax help service can make your life a whole lot easier. Not only can a tax professional help you stay abreast with new rules and regulations, but they can also advise you on what records need to be kept and which aren’t necessary. Make this upcoming tax season easier on yourself by staying organized.