While filing your taxes this year, you probably scrambled to find records, receipts and bills.
If you start planning now, you can make the job easier next time you file your taxes.
Here’s a list of the records that you should keep track of between now and next year that can make filing your 2013 taxes less stressful.
Income tax returns and related items. Keep all federal and state income tax returns and supporting documents for at least three years after the return’s filing date. This includes those items confirming your income and deductions. But it’s even more prudent to keep these returns and documents for six years.
Why six years? The Internal Revenue Service can assess additional taxes within three years of its filing date, but has up to six years to make a tax assessment if the agency determine that you omitted a substantial amount of income from the return.
Mailing receipts. Also hang on to the registered mail receipt for each tax return in case you need to show the date you mailed it. If you filed electronically, keep a copy of the electronic filing confirmation with a printed copy of the return. If you or the Postal Service misplace or lose the return, this documentation can save you from penalties.
Residential property records. Keep settlement records from all of your home purchases and sales in a safe place. This helps you calculate your tax basis for any future sale and gain determination. Basis is the amount of capital you invested in the house – the purchase price and upgrade costs, generally.
When you sell, the basis determines your capital gains rate. Since the amounts that you spend for home improvements also count toward your basis in the house, save records of those outlays, as well.
Stock and bond records. Hang on to records of your stock, mutual fund and bond purchases. These records prove the date you bought, which determines whether your profits are taxed as long- or short-term capital gains. The IRS taxes gains on securities that you hold for longer than a year at a lower rate, and so do some states.
These security purchase records also establish your basis in the investment and help to compute the gain or loss when you sell. In addition, keep records that show a return of capital on your investments.
Depreciation records. You can deduct taxes every year on items that decrease in value or become obsolete over time. For example, if you buy a computer for an employee at your company, you can deduct part of its cost from your business taxes every year until you have to buy him a new one.
For any rental real estate or depreciable business property that you own, keep records of the property’s cost, the purchase date, the method used to calculate depreciation and a schedule of all depreciation claimed on the property in previous years. Maintain these records until you sell or dispose of the property. Once you sell the property, keep these records with the tax return that reports the sale.
Personal records. Maintain a permanent file of personal records such as divorce agreements and copies of estate or gift tax returns. These provide a basis for determining your tax liability when you dispose of the property later.
Other records. If you made nondeductible contributions to an individual retirement account or Roth IRA, having these records makes it easier to prove your tax liability when you withdraw funds from the account during retirement.
If you are not sure whether a certain document is necessary to keep, err on the side of caution. Storing important records is easier than ever, thanks to cloud storage. Keep paper copies if possible, but just in case, scan your documents and store them in a remote location, such as Dropbox.
This way, even if your house floods and your computer breaks, you can rest assured that you have the right documents ready and easily accessible for filing your taxes or protecting yourself in an audit.
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