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Monday, February 14, 2011

How long should you keep tax records?

Tax records
Validity of tax records is determined by statutory law
Knowing how long you should keep your tax records involves understanding  legal requirements,  personal finances and tax record keeping systems. In some cases records from may years past can have bearing on a tax reduction claim many years into the future. For example, capital gains from long-term capital holdings are not taxed until the transaction incurring the capital gain is made.

Additionally, according to IRS Publication 523 tax reductions having to do with home renovations may not incur tax reductions until after selling the home. In other cases, tax records become of no legal, financial or personal use. For example, a tax return filed 20 years ago for which all taxes due were paid and accurately recorded may be of no present use legally, contractually or personally. This may be due to limitations in statutory law, completed tax transactions, financial irrelevance to lenders and personally.

Reasons why tax records are kept affect their retention


Since tax records help demonstrate income earning history, tax filing data, credibility, and tax payments made and received, keeping tax records can be useful in a number of situations. For example, in terms of disputed tax payments, having tax records can help justify your case. In other instances lenders may require tax records to justify loans with banking policy.

In other words, the nature and necessity that your personal finances make on your tax record keeping practices will partially determine how long you should keep tax records. A list of the situation in which tax records may be used and/or required is below along with length of time the records are suggested to be kept.

• Mortgages and personal loans: 3-5 years
• Long term capital gains tax: Indefinite
• Internal Revenue Service audits and claims: 3-6 years
• Other Statutory limitations: Up to 10 years
• Individual record keeping: 3 or more years
• Tax disputes: Determined by financial scenario

Factors influencing how long tax records are kept


In some cases the laws governing taxes can change which can also affect how long and if you should keep tax records. For example, the Statute of limitations for tax cases may vary depending on the exceptions to the rules regulated and noted by the IRS, and type of tax involved. Moreover, some home improvements that met have qualified for tax credits in the past, may not in the present of future, an example being the Non-Business Energy Property Credit valid for 2009 and 2010.

In some cases some the improvements may affect medical expenses in which case the tax records can be used for the same tax year in which they were incurred. Additionally, in the case of home improvement financed via mortgage loans, the interest on the loans may qualify for tax deduction.

Tax record keeping and retention


Having a tax record system can assist with filtering and processing tax records so they don’t accumulate, but remain steady at a fixed rate of documentation thereby minimizing filing and storage requirements. The system may also involve digital record keeping on flash drives, hard drives etc.

With a good record keeping system, knowing how long you should keep tax records can also be facilitated. For example, a 1 box record system with 11 files, one for each tax year can never exceed 10 years of records with one file for time exempt records such as home expenses. To keep the files from getting too chunky an enhancement to the record keeping system can be used.

To illustrate the aforementioned tax record keeping enhancement, a tax record system may have two levels of importance and divide tax records into primary, secondary and tertiary levels of relevance. The primary documents may include things like Form 1040’s filed with the IRS, W-2’s and 1099-Miscs; the secondary tax records might include bank statements between 6-12 months old, major purchase receipts and mortgage statements older than 6 months.

Tertiary tax records might include previous tax year 1040 instructions from the IRS, IRS informational letters, or 1099’s and bank statements from previous tax years. Then for additional organization, the tax records in these three categories may be divided into two levels, the first of which contains legally required and/or financially beneficial tax records, and the second of which contains less important and/or non-required tax records.

The question of how long you should keep your tax records is determined by multiple factors such as tax law, statutory law, personal finances and record keeping systems. Some people may only keep the bear minimum of tax documents if they keep any tax records at all. Others may pay closer attention to possible situations in which the tax records may be required, needed or beneficial for tax deductions, disputed claims or audits. In any case, tax records are a part of living in a society in which taxation is institutionalized. Such being the case tax records may be kept, may be required to be kept, and may be kept for varying amounts of time.

Source: http://www.irs.gov

Image license: Alan Cleaver, CC BY 2.0