Tax Documents You Should Always Keep

Once you’ve filed your tax return, you probably don’t feel like keeping all the papers – W-2, 1099s and more – or even thinking about taxes. But there are some documents you want to retain indefinitely. Making a practice of keeping papers you’ll need for the future will pay off in tax savings later on. Here is a rundown of those documents and why you should keep them.

The IRS has a limited time in which to audit returns (generally three years from the due date of the return). However, this limit does not apply if the IRS thinks you never filed a return. If the IRS sends you a letter indicating you never filed, it’s up to you to prove otherwise. In order to do this, retain a copy of your return forever, along with proof of filing. The type of proof depends on how you filed your return:

• For paper returns: A registered or certified receipt or the slip from a private delivery carrier (e.g., FedEx, UPS).
• For electronic returns: The email acknowledging your return was accepted for filing. If you use software to file, the email is generated by the software (e.g., TurboTax sends you an email). If you use a paid preparer, ask for an acknowledgment from the preparer that your return was accepted for filing.

The same is true for state income tax returns. Keep forever a copy of the state income tax return, along with proof of filing. 

For many people, a personal residence is their largest single asset, and one that can generate a sizable tax bill when sold. The tax law allows up to $250,000 of gain on the sale of a principal residence ($500,000 for joint filers) if certain conditions are met. If these conditions aren’t met – or if the gain exceeds the dollar limit – a taxable gain results. In order to minimize gain, it is helpful to maximize the basis of the home. Basis, which starts with what you paid for the home, can be increased by capital improvements, such as an addition, a new roof, appliances, an in-ground swimming pool and landscaping.

The longer you own the home, the more likely that (a) the price you get when you sell will be higher than what you paid and (b) that you’ve put more money into the home for improvements. Find a list of capital improvements for which you should save receipts or other proof of payment in IRS Publication 523 (2017 update not published at time of writing).

In addition to home improvements, retain your initial settlement statement and other papers related to the purchase. This enables you to add to your cost basis the following:

• abstract fees (abstract of title fees)
• charges for installing utility services
• legal fees (including fees for a title search, preparing the sales contract and preparing the deed)
• recording fees
• survey fees
• title insurance
• transfer or stamp taxes

Keep a record of these expenses for as long as you own your home, and then for at least three years after you file your return reporting the sale. The three-year period in most cases is the time in which the IRS can question your position.

As in the case of home improvements, you want to keep records related to other property – stocks, a vacation home, rental property or art work. Again, you need to know what you paid for property, including commissions and other acquisition costs, so you can properly figure gain when you sell. If you don’t, you may have to pay more in taxes than would otherwise be due (it’s up to you to prove your tax basis if the IRS challenges your return).

As in the case of records related to your home, keep these records for as long as you own the property, and then for at least three years after you file your return reporting the sale of the property.

Note: Brokerage firms and mutual fund companies now are required to provide basis information on certain securities (e.g., stocks acquired from them since 2011). However, it’s wise for you to retain this information in case you change firms or firms merge and your records are lost (it happens).

When you inherit property, your tax basis becomes the value of the property on the date of the death of the person who left it to you (called stepped-up basis). Large estates (those valued over $11,180,000 for those dying in 2018) report the value on a federal estate tax return (Form 706). Smaller estates may have to report the value of property on state death tax forms even if no federal return is due. Ask the estate’s executor, administrator or personal representative for this information. (The new tax legislation doubled the basic exclusion amount for estate tax from roughly $5 million to $10 million.)

For estates that are not required to file such returns, it’s up to heirs to determine value, which becomes the basis of the property. If you inherit publicly traded securities, obtain the value of them for the date of death. If you inherit realty, you may want to get an appraisal for the time of death so you can demonstrate your basis later on. Again, as with other property, retain this information for as long as you own the property, plus the period in which the IRS can question your report of a sale.

Record-keeping may seem tedious and cumbersome. Create a record-keeping system that works for you. Simplify your papers by creating an electronic record (e.g., scan documents you want to keep and retain them in a file on your laptop, on a flash drive or in the cloud).

In fact, keeping copies of your key records in the cloud and/or at some other location is an important safeguard, as well. Laptops and flash drives can crash or be lost. And even with electronic records, file the paper ones as well, just in case. It could save you a lot of trouble if you – or your heirs – need them in the future.