If you subscribe to the shoebox method of tax record-keeping, we’re here to help.
The latest tax filing season is ending, so you may be wondering how to handle that big pile of receipts, pay stubs, cancelled checks, and brokerage statements cluttering up your dining room table. Well, there are some simple rules to help determine which records you can safely toss (shred first!) and which documentation you’ll need to keep.
Have doubts? Ask your tax professional first.
Understand the three-year rule. The IRS can audit you or request additional documentation on tax returns for up to three years from the date a return was filed. But, that three-year rule goes two ways! Taxpayers also generally have up to three years to amend their tax returns in order to claim additional refunds.
You’ll want to keep your last three years of tax returns and all records related to sources of income and expenses for that time period. This includes W-2s, 1099s, and K-1s for income and cancelled checks, mortgage statements, receipts, and bank statements.
Exception to the three-year rule. Tax-law violators, beware. The statute of limitation on an IRS audit is six years if the taxpayer didn't report income that is more than 25% of the gross income shown on the return.
“There is no statute of limitation if a taxpayer files a fraudulent return or does not file a return. The IRS can come after a taxpayer anytime fraud is involved," explains Steve Ribble, CEO of Guardian Accounting Group.
Go ahead and toss. The IRS makes it easier for those who need to track work-related expenses. It’s generally okay to toss receipts for expenses under $75, with the exception of lodging. You might choose to record your expenses in your files and throw the receipts away. Go ahead and toss pay stubs after reconciling them against your W-2. Also, some taxpayers won’t need to keep bank statements or financial documents for more than a year, unless they’re needed to support tax filings.
Property records are different. Before you kick your shredder into high gear, remember that home-related expenses are not deductible on an annual basis, so you’ll want to hang on to these until you can potentially use them. Home improvement expenses can help reduce the taxes you have to pay when you sell your home at a profit. That’s because the cost of home improvements are added to the “tax basis” of your home. The greater your basis, the less profit you'll receive when you sell your home. In general, plan to find safe storage for property records.
"Keep real estate deeds, home purchase and improvements records, and mortgage documents as long as you own the property. Keep insurance documents until you renew the policy," Ribble says. And don't forget to hang onto those records three years after the sale of your property.
About those stock portfolios. Be sure to hang onto all of your brokerage confirmations and statements for securities and mutual fund purchases until three years after the security is sold—this is especially important if you have any on dividend reinvestment. While it's true that brokers are now required to track and report basis, it's still a good idea to to keep your own records should any discrepancies arise.
Make it easier for next year. Keep organized records. Don't hand your accountant or CPA a huge box of receipts. Doing that will only increase the time it takes to prepare your tax return—and it will likely impact your fees. As you toss your shoeboxes in the recycling, think about creating a filing system—maybe even an electronic (and backed up) one—that’s organized by year, then by category, to keep track of the expenses that you can deduct.
"If you normally take the standard deduction on your tax return—$6,200 for individuals or $12,400 for married filing jointly—you don't need to keep your donation receipts if they won't get your itemized deductions over the standard deduction. Also, if you won't be over the 10% floor for medical deductions, you don't need to keep track of them," Ribble explains.
With a few tweaks to your record-keeping approach, you may be able to cut back on the hours spent at tax time next year. After all, wouldn’t you rather spend those hours spending, saving, or investing your refund check?
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