Tax Advantages of Home Ownership
Category: Tax
What records do you need to keep for tax purposes?
For individuals and businesses alike, records of all income and deductions are essential to accurately preparing and submitting tax returns. This includes records of income such as wages, investments, and income from other sources, as well as deductions for expenses or charitable contributions. These records help ensure you are paying the correct amount of taxes, which is the best way to avoid any questions from the IRS. Furthermore, if the IRS or other tax authorities have questions, having these records on hand can make it easier to provide the answers in a timely fashion.
Generally, individuals should keep records and documentation that support what they claim on their tax return for at least three years after filing. These should include records of:
- all your sources of income,
- the total of any withholding and estimated tax payments you make, and
- the expenses you may be entitled to deduct.
Meanwhile, businesses should also keep detailed records of all transactions. Some, such as purchases, sales, payroll, and other transactions, will generate supporting documents like sales slips, paid bills, invoices, receipts, deposit slips, and canceled checks. These documents should be preserved, even if you have entered the information they contain into your books, as they support those entries (not to mention your tax filings).
Additionally, businesses with employees must keep employment records available for IRS review for at least four years after filing the 4th quarter of the year. These include your employer identification number (EIN), records of wages, tips, employee information, benefits, and more.
Finally, businesses should also keep track of assets — the property, such as machinery and furniture, that you own and use in your business. If you sell the assets, you’ll also need records to compute the annual depreciation and gain or loss on the assets sold.
Can the IRS audit you after seven years?
In short, not usually — but there are exceptions. Under normal circumstances, the IRS can include returns filed in the last three years in an audit and tries to conduct an audit as soon as possible after the return in question is filed. Accordingly, most audits are conducted on tax returns filed within the preceding two years. That said, if they identify a substantial error, the IRS may choose to extend the audit window further back — usually, they will not go back further than six years.
(If you are audited — don’t panic. Here are some steps you can take right away to prepare to navigate the process with confidence.)
What records must be kept for ten years?
For business owners, there are some additional requirements for employee records, including some that must be maintained for long periods or permanently.
For example, while it’s a good idea to keep any records for at least three years, and payroll and benefits information should be kept for seven, you should also keep records such as these for at least ten years:
- Workers’ compensation benefits
- Employee-withholding-exemption certificates
- Payroll tax records
Records which you should save permanently include:
- W-2 forms
- Payroll tax returns
- Retirement plan agreements
Do I need to keep grocery receipts for taxes?
Many individual taxpayers often wonder whether they need to save their receipts for their taxes. The short answer is: If you want to use them to claim an itemized deduction or credit…then yes!
Although it can be tedious, saving receipts for deductible expenses like business dinners are the best way to document such expenses — especially if the receipt is the only proof of purchase.
Regarding groceries, the IRS generally does not allow individuals to write off food items. Even if you are self-employed, the IRS is unlikely to consider your groceries an ordinary expense directly related to your work (and therefore tax-deductible). However, some freelance professionals, such as AirBnB hosts or food bloggers, may be able to deduct food expenses. If you are a food vendor or restaurant owner, groceries may also be a business expense.
What tax records can I destroy?
As mentioned above, any important tax record should be kept for a minimum of three years. In some uncommon circumstances, the IRS may require it for extended periods after filing the return. Additionally, records related to assets, real estate, stocks, or other investments should be kept indefinitely.
Once the applicable statute of limitations runs out, it is usually safe to eliminate certain records that are no longer needed. If a return is four years or older, you are likely in the clear to get rid of supporting documents such as receipts — but hold on to the return itself, as well as the IRS confirmation.
How to organize tax documents
Of course, the effectiveness of all the record-keeping discussed above relies upon one key component: organization!
Organizing your tax documents can be a daunting task, but your record-keeping is only as helpful as your ability to find a specific record.
First, you must designate a safe and easy-to-access place to keep all your records orderly. This could be a file cabinet, shelf, or even a folder, depending on the extent of your record-keeping need. Next, it is essential to group documents according to categories, such as by year and type of income or expense. Additionally, you should keep last year’s tax return handy.
As you can likely imagine, digitizing your records has numerous benefits — especially if you run a business or have complex personal taxes requiring a lot of supporting documentation. Digital record-keeping can be more secure and can be backed up to multiple locations. It is also more efficient, as records can be accessed quickly and easily. Finally, digital record-keeping is cost-effective and saves space.
Unsure what kinds of records you should save, how long to save a specific record, or what to do in the event of an audit? Consulting with a tax professional is the best way to get your questions answered — and may help save you money or avoid making costly mistakes when filing your tax returns this year.
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