With all the online and paperless options these days, many Americans are keeping fewer physical copies of tax documents. As you probably know, however, there are some important pieces of paperwork you should hold on to just in case. Tax documents, for instance are useful to have as proof for any discrepancies with the IRS.
Documents you should keep on hand
1. W-2 Forms
This is probably the most important document to keep around for at least a few years. A W–2 form reveals details about your income, along with a record of taxes withheld from your paychecks. It shows the bulk of your taxable income. It also represents the majority of the money that is sent to the IRS on your behalf to cover your income tax liability.
W2 forms can be used to justify the numbers on your final tax returns. A few years worth of these forms are usually also required if you’re obtaining a mortgage or refinancing your home.
2. 1099 Forms, brokerage statements, IRA and other retirement plan statements
These forms are especially important for investors. They include records of interest received, dividend income, and the basis and sales proceeds from investments you’ve sold. All this information is helpful in calculating your capital gain or loss.
3. 1098 Forms (home mortgage interest), payments for state and local real estate taxes, documentation of charitable donations
These documents are important to keep around from a deduction standpoint. They prove to the IRS that you deserved all the deductions you claimed.
4. Proof of health insurance
This relates to the Affordable Care Act. In order to avoid paying a penalty to the IRS, you need to establish you had creditable health insurance coverage or qualified for an exemption. Make sure you keep adequate records that you were continuously insured.
How long should you keep certain documents?
Are you worried they’ll start collecting dust? Well, that’s better than throwing them away and later realizing you need them.
The exact length of time you should keep each document varies. The key question is the length of time the IRS will have to challenge you on the information.
Most tax returns have a three-year statute of limitations from the date or the return or filing date, whichever comes later. That means the IRS usually can’t come back and make a challenge once that time period has passed.
Exceptions to the statute of limitations are as follows
–If you underreport your income by at least 25% (return can be audited up to six years after the date of filing)
–If the IRS believes you have committed fraud (keep any documents indefinitely you feel would protect you from this)
Other documents you should consider keeping longer
I recommend keeping records of investment purchases and sales. These statements of the gains and losses you claimed can be valuable both now and in the future. If you make repeated investments in a particular stock or fund, it can be useful to know what shares you sold at what time. Such documents can greatly assist with the complex nature of tax basis when dealing with such investments.
The bottom line
Keep your tax-related documents a least a year or two longer than the recommended time, and keep them organized.
When it’s tax time, you have to gather all that paperwork in once place anyway. So why not just keep them all organized in a folder with the year of that year’s tax return? Store them in the same file cabinet, so that way if you ever need them, you’ll know exactly where to find them. For more ways to improve your finances after tax season, read this post.