Nothing lasts
forever, but you wouldn't believe it by looking at some people record-keeping
systems. Prolific pack rats insist on keeping every scrap of paper, just in
case. And when it comes to tax paperwork, folks are even more adamant. These
documents will save me, they argue, if an Internal Revenue Service auditor
comes visiting. But that’s not necessarily the case, say tax
and organizational experts.
There are limits
When it comes to
tax-related documents, you should hang on to records that help you identify sources
of income, keep track of expenses, determine the value of property, prepare
tax returns or support claims made on those returns. However, common sense--as
well as storage space--should be your guide. "We get people looking at
boxes of stuff in their basements and ask, ' Can I toss it? '" says Linda
Durand, a CPA and senior tax manager with Drolet & Associates PLLC in
Washington, D.C. "A lot of it, they can."
The rule of thumb
for tax papers is hold onto them until the chance of audit passes. Usually,
this is three years after filing. But if the IRS suspects you underreported
your income by 25 percent or more, it gets six years to check into your tax
life.
That’s why most
accountants advise taxpayers, even those who are meticulous fillers, to keep
tax documents for six to 10 years.
Use it or lose it
This means 1040
forms and any accompanying tax schedules, along with the documents supporting
the return, such as W-2s, 1099 miscellaneous income statements and receipts or
cancelled checks verifying tax-deductible expenses.
"Anything
that you need to do your taxes, hang onto it," says Saul Rudo, a tax
attorney and partner in the Chicago office of Katten Muchin Rosenman LLP. But
don't go overboard. If you used something to claim a deduction, keep it. If
not, shred it. For example, says Rudo, all those medical bills are useless--and
just taking up space--if you didn't accumulate enough to meet the deduction
threshold.
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