requirements. Here’s the information you must store in your records in order to satisfy the dreaded IRS when it comes to income (as it applies to your particular financial situation). We’ll discuss many of these in the chapters to come:
• Paystubs—especially the final, year-to-date paystub at the end of the year (just in case you don’t end up getting a W-2) or at the end of a job if you leave during the year.
• W-2s, 1099s, 1098s, K-1s, and all other third-party notifications.
• Bank and brokerage statements. Keep a paper or electronic copy of each statement for each and every bank account. That includes PayPal, Itex, Bitcoin, and all other online accounts—including investment accounts.
• Securities trades—sales, purchases, short sales, straddles, and so on. You are the best source of information about the basis of your securities.
• Business income. Do not rely on 1099-MISCs. It’s is your responsibility to keep your own books when you have a business. Just make sure the total of the 1099s you receive is less than or equal to the business income you report.
• Distributions from partnerships.
• Alimony, unemployment, state refunds, disability, and other miscellaneous sources—often forgotten, but generally taxable.
• Rental income—on your commercial or residential real estate, or your own home, or rooms in your home via private or commercial sources or places like AirBnB.
• Retirement income—Social Security, IRA and retirement account withdrawals.
• Sales of assets. Not all sales are taxable, but all must be reported.
• Awards, prizes, scholarships—surprise, surprise, surprise. Not only are these things often taxable, but when children receive them, they might be subject to kiddie tax (tax at the parents’ highest tax bracket).
• Gambling income. Even if you lost the W-2G the casino or gambling establishment gave you, the IRS has a copy of it.
• Barter income—whether through formal clubs or informal barter. Some of the transactions might be taxable. And some of the reported transactions might have deductible offsets.
• Inheritances and gifts. Often there is no taxable income until the assets you receive are sold or cashed out, but there may be some reporting required.
• Hobby income. Sources could be eBay, ePage, Etsy, or other hobby income sites. There are special rules for reporting hobby income and deductions. You’re going to hate these particular rules.
• Cancelled debt—on credit cards, real estate, and personal debt. I hate to tell you, but this invisible income is taxable.
• Jury pay. It’s not much. And you often return it to your employer, but . . . remember to enter it because the IRS knows.
Tip #5:
Expense requirements. Here’s the information you must store in your records in order to satisfy the dreaded IRS when it comes to expenses (as it applies to your particular financial situation):
• Keep copies of all your cancelled checks—even if it’s only a PDF copy.
• If you pay cash for something major, get a receipt and scan it into your online filing system or file it into your paper file.
• If you pay cash for something minor like parking, valet, tips, and so on, keep a small pad of paper handy (or 1" × 1" Post-it). Write the date, time, location, and amount on a separate page for each instance. File it or scan it by the end of each day.
• When it comes to charity, never pay cash. Always use a check, credit card, or online payment (like PayPal). Get a formal receipt for all donations of $250 or more. (More detail later in Chapter 10: Charity Deductions Begin at Home.)
• Credit card statements are not enough to prove what you bought if you want to deduct it. You need the receipt as well. For big-ticket items, be sure to keep the receipts. (Besides, it helps for returns and warranties.)
• Save your property tax and vehicle registration bills with all the details they show. It doesn’t hurt to copy the check or electronic payment and keep it with those receipts.
• Make a copy of every estimated tax payment you make for the IRS, state, or local taxes. Be sure to show the form number, year (or quarter), and type of tax you have just paid.
• Keep mileage logs for all driving so you can later deduct medical, charity, volunteer, moving, and/or business miles.
• When it comes to home improvements, always keep copies of all the invoices and proofs of payment. The details may come in handy for tax credits, warranties, or reducing profits when you sell the property.
• If you get tips on your job, keep the details about the tips you get and those you share with other workers at your job.
• For more details on how to keep records, read chapter 1 of IRS Publication 17—Your Federal Income Tax (https://www.irs.gov/publications/p17/pt01.html).
How long should you keep records? This is one of the most common questions people ask TaxMama.
Tip #6:
You don’t need to keep everything forever . . . but do keep tax returns forever. People are often shocked when the IRS or state pops up saying a tax return has never been filed for a given year, five or ten years ago. Without a copy of that tax return, it’s nearly impossible to prove that you did file. They don’t take up much space. You can even scan them (preferably as PDF files), as long as you are certain that the copies are clean, readable, and retrievable a decade from now. Do you need all the backup records that went with the tax return? Not necessarily. But keep those for at least six to seven years.
Tip #7:
The IRS is generally only permitted to audit for up to three years after you file a tax return. However, if you have underreported gross income, overreported expenses, or have overstated the basis of assets by 25 percent or more, the IRS has the right to audit for up to six years. If there are criminal omissions or overstatements, the IRS may audit forever. But that should not apply to you. Add one to two years for state deadlines.
What about other records?
Tip #8:
Keep the following records until at least six years after the contracts or terms expire or assets are sold:
• Copies of all contracts, warranties, original insurance contracts, and loans. You will need these to ensure that the terms are met in the event you need to file a claim or a dispute. The (annual) invoices aren’t enough. The original contracts contain the terms.
• Purchase documents for real estate, and all improvements to the real estate. These will help you when you sell the property—or if you want to convert it to a rental.
• Copies of the original property’s purchase and sale, and the tax return reporting of the rollover if you ever rolled over gains—in either tax-free exchanges or the sale of a home—before 1998. (If you don’t have the records, start digging.)
• Purchase information and all splits of all stocks or securities that you are still holding (or sold this year). If you reinvested dividends, don’t forget to add those reinvestments to the cost. If you don’t have all the details, but know approximately when you originally bought the stock, www.netbasis.com can reconstruct the entire history of your ownership and compute your basis for a small fee.
• Deductions for funding a regular Individual Retirement Account (IRA). Sometimes, though, you make after-tax contributions. Be sure to track those, since