When tax season ends, you may be tempted to declutter by tossing out old documents. But before you shred, it’s crucial to understand the importance of tax records. Keeping the right documents can save you time, money, and stress down the road.
Tax records aren’t just for filing season. They serve several vital purposes:
Audit Defense: The IRS typically has three years to conduct an audit, but certain scenarios, such as substantial underreporting of income, extend this window.
Proving Deductions: Supporting documents validate claims like charitable contributions, home office expenses, and investment losses.
Future Financial Needs: Verifying income for Social Security benefits or retirement planning often requires accurate tax records.
Knowing how long to keep your tax records can help you stay organized and compliant:
Pay stubs (until reconciled with W-2s).
Monthly brokerage statements (after confirming against year-end forms like 1099s).
Most tax returns and supporting documents.
W-2 and 1099 forms (income verification).
1098 forms (mortgage interest deductions).
Charitable contribution receipts (if itemized).
Health savings account (HSA) and 529 withdrawal records.
IRA contribution records (traditional or Roth).
Records where 25% or more of income might be underreported.
Records for foreign financial assets with unreported income exceeding $5,000.
Documentation of bad debts or worthless securities.
Records of foreign tax credits claimed on U.S. returns.
Filed tax returns: These serve as a baseline for future audits or amendments.
Investment records: Cost basis is critical for calculating taxable gains or losses upon sale.
Property purchase and improvement records: These help establish the adjusted basis, which reduces taxable gains when selling.
Certain circumstances require additional attention:
Inherited or Gifted Property: Keep records to calculate the basis for tax purposes, such as fair market value at the date of inheritance or the donor’s adjusted basis.
Home Sale Profits: Save records for home improvements and purchase documents to claim capital gains exclusions ($250,000 for single filers, $500,000 for joint filers).
Ready to streamline your tax record management? Capri CPA can help. We offer personalized guidance on what to keep, what to shred, and how to organize your records for maximum efficiency.
Contact Capri CPA today to ensure your financial future is secure and stress-free. Whether you’re preparing for tax season, planning for retirement, or navigating an audit, we’ve got you covered.
Call us now or schedule a consultation online. Your peace of mind is just a click away!