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Record Keeping Tips

When tax time comes around, do you dig frantically through piles of papers looking for the documentation you need to prepare your tax returns? Are you unsure about which records you should keep and which ones you can safely throw away?

Why not make your life easier and ensure that you don't miss any deductions, by organizing your record keeping system early in the year and keeping it up-to-date?

Why Should I Keep Records?

Not only does having organized records make it easier and less frustrating for you to file your tax return, it also enables you to explain an item on your return that the IRS might question, and could prevent you from having to pay additional taxes and penalties for unsubstantiated items.

What Records Should I Keep?

Your checkbook can help you remember income and expenses that should be reported on your tax return, but the checkbook and cancelled checks alone aren't sufficient documentation to prove the deductibility of an expense.

In addition to proof of payment (cancelled checks, credit card receipts), you also need invoices, receipts, sales slips, or other written documentation that spells out exactly what you paid for. Deductions that you need to document may include alimony, charitable contributions, mortgage interest, child care expenses, and real estate taxes. If you make payments in cash, get a dated and signed receipt showing the amount and a description.

To prove that you correctly claimed income from investments such as stocks, bonds, and mutual funds, you need to be able to determine your basis and whether you have a gain or loss when you sell. Your records should show the purchase price, sales price, and commissions, dividends received in cash or reinvested, stock splits, load charges, and original issue discount (OID). An Excel spreadsheet is a great way to track this information, but even a handwritten schedule will do.

If you have deductible expenses withheld from your paycheck, such as union dues, medical insurance premiums, or 401(k) contributions, keep your pay stubs as proof of payment.

Specific records you should keep include:

  • Form W-2 and 1099
  • Bank statements
  • Brokerage and mutual fund statements
  • Form K-1 (for partnerships)
  • Sales slips
  • Invoices
  • Credit card receipts
  • Canceled checks or other proof of payment
  • Home purchase and sales agreements, closing statements, and insurance records

How Long Should I Keep Records?

Although legally you need only keep tax records for three years from the date you filed the related income tax return, you should keep a copy of your actual tax returns, W-2s, 1099s, etc., indefinitely. The IRS destroys original tax returns after three years, and you or your heirs may need information from the returns at some point, or you may need to prove your earnings for Social Security purposes.

For more detailed tax information, see About.com's Taxes site.

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