Julie Jason: How long should you keep tax-related records?
Think about all of those tax returns and supporting documentation you have stored away somewhere. Just how long do you have to hang on to them?
The official Internal Revenue Service response from Tips for Managing Your Tax Records is "normally" three years.
If you explore the rationale, you'll find that it comes from the three-year period during which the IRS can claim you owe additional taxes.
A longer period applies, however, if taxpayers don't report income (six years). If they don't file a tax return or file a fraudulent return, the IRS can come after taxpayers at any time, even 10, 20 or 30 years after the fact.
Should you ever shred your tax returns?
Since most people aren't fraudsters, reason would dictate keeping tax returns for seven to 10 years. However, you'll want to keep some supporting documents longer, perhaps forever.
Some you'll need to hold on to for future tax obligations, such as the sale of a home, or for tax planning, such as knowing your IRA cost basis for Roth conversions.
Some you'll need to for reasons having nothing to do with taxes.
For example, it's a good practice to keep all copies of your wage statements (Form W-2), starting with your very first job. Why? Someday, you'll receive an earnings statement from the Social Security Administration that reports your projected Social Security retirement benefits based on your earnings. You won't be able to check for errors if you don't have your W-2s.
If you have children who are starting new jobs, it's also a good idea to suggest they keep a log of wages that they can update each year at tax time.
Taxpayers who make nondeductible contributions to their IRAs need to keep their Form 8606s, Nondeductible IRAs. This information will help you calculate basis when you consider making Roth conversions and figure out taxes on your IRA withdrawals. Keep a log of your IRA basis as the years go by.
You'll also want to keep an ongoing record of purchases and sales of investments, including your commissions and reinvested dividends. You'll want to keep this information until after you sell the investment plus seven years, to be on the safe side. Read IRS Publications 550, Investment Income and Expenses, and 564, Mutual Fund Distributions.
Likewise, you'll need to keep a record of house purchases and sales, and supporting information for improvements made over time, which increase basis and thus decrease the potential for capital-gains taxes.
Keep a separate file of tax forms related to the purchase or sale of a home, such as Form 1099-S, Proceeds From Real Estate Transactions, Form 1040, Schedule D, Capital Gains and Losses, Form 8949, Sales and Other Dispositions of Capital Assets, and Form 2119, Sale of Your Home.
You would have filed Form 2119 with your Form 1040 if you sold a home before May 7, 1997, postponing the gain on the sale. If that doesn't ring a bell, take a look at the form at http://www.irs.gov.
The deferred gain reduces the basis of your current home.
Before throwing out anything relating to the ownership of a home, be sure to read IRS Publication 523, Selling Your Home.
Don't forget to give information to the recipients of any gifts of assets, such as stock. If you gift stock to children, they will need to know your cost basis so that they can carry it over to their own tax returns. Their cost basis will be your carry-over basis plus adjustments for dividends reinvested and commissions after they become the owners of the stock.
If you plan on gifting more than once, it might help to start the recipient off with a log to keep track of the gifts and the cost basis of each gift.
If the stock is inherited, different rules apply. Read IRS Publication 551, Basis of Assets. If you inherited from someone who died in 2010, read IRS Publication 4895, Tax Treatment of Property Acquired From a Decedent Dying in 2010.
For more information on basis and adjusted basis, refer to Publication 551 and Form 1040, Schedule D Instructions.
For a good overview on record retention, read IRS Publication 552, Recordkeeping for Individuals, which is available at http://www.irs.gov or by calling 800-TAX-FORM (800-829-3676).
All in all, it's probably best to think of record retention as either 1) proof that you will need for the IRS or 2) something you will need for your own decision-making or planning.
To meet IRS needs, think in terms of seven to 10 years. To meet your own needs, be selective as to what you might need to keep longer.
Julie Jason, JD, LLM, a personal money manager (Jackson, Grant of Stamford, Conn.) and award-winning author, welcomes your questions/comments (firstname.lastname@example.org).