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Your Money: Record Guide

As a result of changes in the tax law and the prospect of more scrutiny by the Internal Revenue Service, record keeping is now necessary in some areas that never required records before.

How long to keep records is a combination of judgment and state and federal statutes of limitations. Most records have to be held for only three years after the due date of your tax return. That’s when the statute of limitations expires for tax audits by the IRS and refund claims by the taxpayer. But some records should be kept indefinitely, especially those relating to the acquisition of property, whether by purchase, gift, or inheritance. Upon sale of property, you will need to determine the profit or loss with proof of the original cost and any improvements.

Tax returns are kept indefinitely as proof of filing since there is no statute of limitations on unfiled returns. Some returns can be audited up to six years if the IRS suspects underreported income. It’s wise to keep those tax records indefinitely. Requirements for records kept electronically are the same as for paper records.

Business meal and entertainment expenses are 50% deductible, whether you are eating out alone or entertaining clients. Included in this limit is food, beverages, cover charges, gratuities, taxes, theatre tickets, etc. Don’t lose or misplace a single receipt for meal and entertainment expenses of $75 or more. Keep a diary to record the details, especially if you entertained others. A good idea is to keep the diary with you to help you jot down notes.

The forms you fill out when you set up an IRA may be needed decades later to determine how the IRA is distributed and taxed. In a number of cases, such forms have been lost or misplace by IRA trustees or custodians due to mergers, acquisitions or administrative oversight.  When you file an IRA form or make an IRA election, send duplicate copies of the document to the IRA trustee and have one acknowledged copy returned to you.

The IRS requires that you document fully the flow of funds for all loans you take in order to determine the deductibility of the interest. Personal mortgage interest on two residences is fully deductible up to certain limits. The deductibility of other interest depends on how the funds are used. Funds borrowed for the purpose of making investments are deductible to the extent of your investment income. Personal interest is not deductible. Interest that you pay on funds used to purchase a passive activity or real estate is lumped with the gains or losses from that activity. The record-keeping requirements are very stringent.  Now the burden of proof is on you to show proof of the flow of funds.

Generally, follow theses recommended retention periods for the various documents:

Record Retention Period
Tax returns (uncomplicated) 7 years
Tax returns (all others) Permanent
W-2’s 7 years
1099’s 7 years
Cancelled checks supporting tax deductions 7 years
Bank deposit slips 7 years
Bank statements 7 years
Charitable contribution documentation 7 years
Credit card statement 7 years
Receipts, diaries, logs pertaining to tax return 7 years
Investment purchase & sale slips Ownership period + 7 years
Dividend reinvestment records Ownership period + 7 years
Year-end brokerage statements Ownership period + 7 years
Mutual fund annual statements Ownership period + 7 years
Investment property purchase documents Ownership period + 7 years
Home purchase documents Ownership period + 7 years
Home improvement receipts & cancelled checks Ownership period + 7 years
Home repair receipts and cancelled checks Warranty period for item
Retirement plan annual reports Permanent
IRA annual reports Permanent
RA nondeductible contributions Form 8606 Permanent
Insurance policies Life of policy + 3 years
Divorce documents Permanent
Loans Term of loan + 7 years
Estate planning documents Permanent

Read more of Julie Sturgeon’s articles by clicking here.

Good recordkeeping can cut your taxes and make your financial life easier.

Julie M. Sturgeon is a Certified Public Accountant in Valencia, specializing in individual and business tax issues. She can be reached at 251-6031 or  HYPERLINK mailto:Julie@cpasturgeon.com Julie@cpasturgeon.com . “Its Your Money” appears Monday and rotates among SCV financial professionals.

Your Money: Record Guide

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