Record retention

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Record retention refers to the practices of maintaining personal financial records, particularly tax related documents.

Why retain records?

There are many reasons to keep records. In addition to tax purposes, you may need to keep records for insurance purposes or for getting a loan. Good records will help you:[1]

  • Identify sources of income. You may receive money or property from a variety of sources. Your records can identify the sources of your income. You need this information to separate business from nonbusiness income and taxable from nontaxable income.
  • Keep track of expenses. You may forget an expense unless you record it when it occurs. You can use your records to identify expenses for which you can claim a deduction. This will help you determine if you can itemize deductions on your tax return.
  • Keep track of the basis of property. You need to keep records that show the basis of your property. This includes the original cost or other basis of the property and any improvements you made.
  • Prepare tax returns. You need records to prepare your tax return. Good records help you to file quickly and accurately.
  • Support items reported on tax returns. You must keep records in case the IRS has a question about an item on your return.

Records to keep

The IRS does not require you to keep your records in a particular way. Keep them in a manner that allows you and the IRS to determine your correct tax.[1]

  • Copies of tax returns. You should keep copies of your tax returns as part of your tax records.

Basic records

Basic records are documents that everybody should keep. These are the records that prove your income and expenses. If you own a home or investments, your basic records should contain documents related to those items.[1]

Proof of Income and Expense
FOR items concerning your... KEEP as basic records...
Income
  • Form(s) W-2
  • Form(s) 1099
  • Bank statements
  • Brokerage statements
  • Form(s) K-1
Expenses
  • Sales slips
  • Invoices
  • Receipts
  • Canceled checks or other proof of payment
  • Written communications from qualified charities
Home
  • Closing statements
  • Purchase and sales invoices
  • Proof of payment
  • Insurance records
  • Receipts for improvement costs
Investments
  • Brokerage statements
  • Mutual fund statements
  • Form(s) 1099, 2439
  • Income. Your basic records prove the amounts you report as income on your tax return. Your records also can prove that certain amounts are not taxable, such as tax-exempt interest.
  • Expenses. Your basic records prove the expenses for which you claim a deduction (or credit) on your tax return.
  • Home. Your basic records should enable you to determine the basis or adjusted basis of your home. You need this information to determine if you have a gain or loss when you sell your home or to figure depreciation if you use part of your home for business purposes or for rent.
  • Investments. Your basic records should enable you to determine your basis in an investment and whether you have a gain or loss when you sell it.

Proof of payment

One of your basic records is proof of payment. You should keep these records to support certain amounts shown on your tax return. Proof of payment alone is not proof that the item claimed on your return is allowable. You also should keep other documents that will help prove that the item is allowable.

Generally, you prove payment with a cash receipt, financial account statement, credit card statement, canceled check, or substitute check. If you make payments in cash, you should get a dated and signed receipt showing the amount and the reason for the payment.

Specific records

This section is an alphabetical list of some items that require specific records in addition to your basic records.[1]

  • Alimony. If you receive or pay alimony, you should keep a copy of your written separation agreement or the divorce, separate maintenance, or support decree.
  • Business Use of Your Home. You may be able to deduct certain expenses connected with the business use of your home.
  • Casualty and Theft Losses. To deduct a casualty or theft loss, you must be able to prove that you had a casualty or theft. Your records also must be able to support the amount you claim.
  • Child Care Credit. You must give the name, address, and taxpayer identification number for all persons or organizations that provide care for your child or dependent.
  • Contributions. You must keep records to prove the contributions you make during the year. The kinds of records depend on whether the contribution is cash, noncash, or out-of-pocket expenses.
  • Credit for the Elderly or the Disabled. If you are under age 65, you must have your physician complete a statement certifying that you were permanently and totally disabled on the date you retired.
  • Education Expenses. If you have the records to prove your expenses, you may be entitled to claim certain tax benefits for your education expenses.
  • Exemptions. If you are claiming an exemption for your spouse or a dependent (a qualifying child or a qualifying relative), you must keep records that support the deduction.
  • Employee Business Expenses. If you have employee business expenses, see Publication 463, Travel, Entertainment, Gift, and Car Expenses, for a discussion of what records to keep.
  • Energy Incentives. If you want to claim one of the tax incentives for the purchase of energy-efficient products, you must keep records to prove: When and how you acquired the property, the purchase price of the property, and that the property qualified for the credit.
  • Gambling Winnings and Losses. You must keep an accurate diary of your winnings and losses.
  • Health Savings Account (HSA) and Medical Savings Account (MSA). For each qualified medical expense you pay with a distribution from your HSA or MSA, you must keep a record of the name and address of each person you paid and the amount and date of the payment.
  • Medical and Dental Expenses. In addition to records you keep of regular medical expenses, you should keep records of transportation expenses that are primarily for and essential to medical care.
  • Mortgage Interest. If you paid mortgage interest of $600 or more, you should receive Form 1098, Mortgage Interest Statement. Keep this form and your mortgage statement and loan information in your records.
  • Moving Expenses. You may be able to deduct qualified moving expenses that are not reimbursed.
  • Pensions and Annuities. Use the worksheet in your tax return instructions to figure the taxable part of your pension or annuity. Keep a copy of the completed worksheet until you fully recover your contributions.
  • Taxes. Form(s) W-2 and Form(s) 1099-R show state income tax withheld from your wages and pensions. You should keep a copy of these forms to prove the amount of state withholding. If you made estimated state income tax payments, you need to keep a copy of the form or your check(s).
    • You also need to keep copies of your state income tax returns. If you received a refund of state income taxes, the state may send you Form 1099-G, Certain Government Payments.
    • Keep mortgage statements, tax assessments, or other documents as records of the real estate and personal property taxes you paid.
    • If you deducted actual state and local general sales taxes instead of using the optional state sales tax tables, you must keep your actual receipts showing general sales taxes paid.
  • Sales Tax on Vehicles. You may be able to deduct state and local sales and excise taxes (or certain other taxes or fees in a state without a sales tax) paid in 2010 for the purchase of a new motor vehicle after February 16, 2009, and before January 1, 2010. Keep your purchase contract to show much sales tax you paid.
  • Tips. You must keep a daily record to accurately report your tips on your return.

How long to keep records

You must keep your records as long as they may be needed for the administration of any provision of the Internal Revenue Code. Generally, this means you must keep records that support items shown on your return until the period of limitations for that return runs out.[1]

The period of limitations is the period of time in which you can amend your return to claim a credit or refund or the IRS can assess additional tax. The table below contains the periods of limitations that apply to income tax returns. Unless otherwise stated, the years refer to the period beginning after the return was filed. Returns filed before the due date are treated as being filed on the due date.

Period of Limitations
    IF you... THEN the period is...
1 Owe additional tax and 2), (3), and (4) do not apply to you 3 years
2 Do not report income that you should and it is 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 The later of 3 years or 2 years after tax was paid
6 File a claim for a loss from worthless securities 7 years

Property. Keep records relating to property until the period of limitations expires for the year in which you dispose of the property in a taxable disposition. You must keep these records to figure your basis for computing gain or loss when you sell or otherwise dispose of the property.

Keeping records for nontax purposes. When your records are no longer needed for tax purposes, do not discard them until you check to see if they should be kept longer for other purposes. Your insurance company or creditors may require you to keep certain records longer than the IRS does.

References

  1. 1.0 1.1 1.2 1.3 1.4 Publication 552 (01/2011), Recordkeeping for Individuals, from the IRS (archived).

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