Tax season can bring a jungle of paperwork into your life: W-2s, 1099s, and the rest. It's very tempting, once you've filed your taxes, to send all those documents to the recycle bin. But, while you may not want to think about taxes for a while, don't be too hasty.
Some of these tax documents will be valuable to you, both immediately for audit purposes, and later on when they could result in tax benefits. Below, we've broken down which papers you should hold onto.
The IRS has a typical audit period of three years from when you filed your return. This clock doesn't start ticking, however, if the IRS believes you didn't file a return at all. In such instances, it's on you to prove that you did in fact file, by holding onto your return and proof of filing.
Proof of filing varies depending on your method of filing:
- For paper returns, evidence of filing includes your certified mail receipt.
- For online filings via tax software, keep your email confirmation.
Similarly, keep a permanent record of your state income tax return and its respective proof of filing.
Considering most people's largest single asset is their personal residence, it's crucial to document its value. If selling your home incurs a large tax bill, you'll want records that maximize your home's basis (the value of the home including any capital improvements, such as an addition, a new roof and even landscaping).
In addition to paperwork for any improvements, always keep your settlement statement and other house purchase-related documents. By maintaining these records for three years after reporting your home's sale, you're in a safe position should the IRS question your declaration.
Documentation for any property - including stocks, vacation homes, and artwork - is critical for assessing financial gains when selling. By keeping these records for another three years post-sale, you can confidently defend your tax basis against any IRS queries.
For property inherited, your tax basis will be the property's value on the day the previous owner passed away, referred to as the “stepped-up" basis. In these cases, for large estates valued over $12.06 million (2022) or over $12.02 million (2023), value should be reported on Form 706 of federal tax returns. For smaller estates, values are often reported on state death tax forms. Regardless of the size of the estate, make sure you keep track of the values of any inherited assets.
Keep track of these essential documents by scanning them and saving in a secure location such as the cloud. As an extra safety measure, also hold onto hard copies in case of electronic mishaps. Implementing a robust and efficient record-keeping system could save you a lot of hassle and potential tax penalties down the line.