I am retired and take educated guesses on all things financial.

March 20, 2007

March 21, 2007: Tax paralysis/what and why?

MONEY MAGAZINE has a current article regarding,in part, what you need to keep and for how long for Federal Tax reasons. I just completed my set of taxes (TurboTax Professional Home and Business).Perhaps this summary might assist you make prudent tax history decisions.I recommend you read the entire issue. It is excellent recreational reading this month (April,2007).

The IRS has up to three years from when you file to look for errors on your return and up to six years to audit you. There is no limit if fraud is involved.

A few document and holding period times:

Tax returns and proof of filings should be held forever, in case you are audited, and to have a history of your finances.

Documents that support your tax return should be held for six years. In case you are audited, the IRS typically has only three years to examine your return for mistakes, but the window becomes unlimited if there is a suspicion of deliberate misconduct.

Receipts should be held until the warranty expires for big purchases and for six years for deductible expenses. You need to establish proof of purchase for warranties, to track deductible expenses for the current year's tax return and to support those write-offs in case of a future audit.

Stock, bond and mutual fund confirmations should be held for six years after you sell if you have a gain, and six years after you claim a loss if you had a loss.
You need to prove to the IRS how you accounted for the gains or losses.

Medical bills should be held one year, or six years if you deduct medical expenses. If you itemize, you must have proof in case of an audit.

Pay stubs should be held until your W-2 arrives. You should confirm the information against your W-2 summary.

401K and IRA investments should be kept until your year-end summary arrives. Check your summary carefully against the statement. Keep the statement for your long-term files.

Bank statements should be kept until year end and longer to confirm your 1099. And longer still for tax audit purposes (six years).

Utility bills should be kept until the end of the year to track usage if you deduct a home office.

Credit card statements need only be kept one month. However, I never throw mine out as they provide a useful record of transactions and are proof of purchase. Your credit card company(s) should keep your records on line.

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