ecords for only three years, but some records have to be kept longer than that.
Remember, the three-year rule relates to the information on your tax return. But some of that information may relate to transactions that are more than three years old.
Here’s a checklist of documents you should hold on to:
1. Capital gains and losses. Your gain is reduced by your basis — your cost (including all commissions) — plus, with mutual funds, any reinvested dividends and capital gains. But you may have bought that stock five years ago and you’ve been reinvesting those dividends and capital gains over the last decade. And don’t forget those stock splits.
You don’t ever want to throw these records away until after you sell the securities. And then if you’re audited, you’ll have to prove those numbers. Therefore, you’ll need to keep those records for at least three years after you file the return reporting their sales.
2. Expenses on your home. Cost records for your house and any improvements should be kept until the home is sold. It’s just good practice, even though most homeowners won’t face any tax problems. That’s because profit of less than $250,000 on your home ($500,000 on a joint return) isn’t subject to taxes under tax legislation enacted in 1997.
If the profit is more than $250,000/$500,000, or if you don’t qualify for the full gain exclusion, then you’re going to need those records for another three years after that return is filed. Most homeowners probably won’t face that issue thanks to the 1997 tax law, but of course, it’s better to be safe than sorry.
3. Business records. Business records can become a nightmare. Non-residential real estate is now depreciated over 39 years. You could be audited on the depreciation up to three years after you file the return for the 39th year. That’s a long time to hold on to receipts, but you may need to validate those numbers.
4. Employment, bank and brokerage statements. Keep all your W-2s, 1099s, brokerage and bank statements to prove income until three years after you file. And don’t even think about dumping checks, receipts, mileage logs, tax diaries and other documentation that substantiates your expenses.
5. Tax returns. Keep copies of your tax returns, as well. You can’t rely on the IRS to actually have a copy of your old returns. As a general rule, you should keep tax records for six years. The bottom line is that you’ve got to keep those records until they can no longer affect your tax return, plus the three-year statute of limitations.
6. Social Security records. You will need to keep some records for Social Security purposes, so check with the Social Security Administration each year to confirm that your payments have been appropriately credited. If they’re wrong, you’ll need your W-2 or copies of your Schedule C (if self-employed) to prove the right amount. Don’t dispose of those records until after you’ve validated those contributions.
Richard L. Lipton CPA & Associates LLC, Florham Park, NJ, draws on its founder’s 10 years as a stockholder and manager of family-owned Sam’s Tire Co. in Paterson, NJ, and serves clients who have a need for business consulting, accounting and tax services. Contact Richard Lipton at 973-520-8123; e-mail [email protected]; or at www.liptoncpa.com.