NEW YORK - When it comes to tax paperwork, many people are adamant about keeping every scrap of paper, often believing that those documents will save them if the Internal Revenue Service comes knocking. That's not necessarily the case.
Bankrate.com tax writer Kay Bell has these tips on how to sift through piles of tax-related documents and keep only the ones you need.
When it comes to tax records, says Bell, you should hang on only to those 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. 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 canceled checks verifying tax-deductible expenses.
But don't go overboard. If you used something to claim a deduction, keep it. If not, shred it. For example, hoarding medical bills is useless if you didn't accumulate enough to meet the deduction threshold. Let common sense, as well as storage space, be your guide.
Some records should be kept longer. They include those pertaining to assets that a taxpayer will eventually sell, triggering a tax bill. So if you have a pension plan, own a home or invest in the stock market, tax professionals recommend keeping records indefinitely. At the least, you should keep them until three years after you dispose of the asset.
The rule of thumb on keeping tax papers is to wait until the chance of audit passes. Usually, that is three years after filing. But if the IRS suspects that 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 filers - to keep tax documents for six to 10 years.
Because most taxpayers' biggest assets are their homes, it is important to understand the rules governing profits from home sales. Tax rules have changed in recent years, meaning that profits on home sales don't automatically face IRS charges. Any paperwork relating to a residence should be kept for as long as the home is owned.