Preparing for Tax Time: What Documents to Keep and What to Toss

The worst year that many of us can remember is finally over and yet 2020 continues to add insult to injury. January 2021 has just begun and already tax season is upon us. While this is routine it nonetheless comes as a rude reminder of a year we would all like to forget. Don’t let bad become worse by trashing essential documents you might need down the road. After all, if there were ever a tax return to be audited, it is fitting that it be from 2020.

Documents to Keep Indefinitely 

While some tax-related documents need not be kept any longer than a few years (more on that later), others should not be discarded (almost) ever. These include:

1. Tax returns, themselves

Since there is no statute of limitations for an audit if you didn’t file a return or if it is later alleged that you did so fraudulently, you should keep your tax returns indefinitely to avoid any such problems.

2. Records related to real estate or investments

As long as a property or investment account is in your name, you should hold on to relevant records. Once sold, keep a record of having reported the sale on your tax return for at least three years.

3. Records related to retirement accounts

Much like the above, you should hang on to records associated with your retirement accounts until the last withdrawal has been reported on your tax return plus three years.

4. W-2 forms

However tedious, it is important to retain W-2 forms until you begin receiving Social Security benefits as you may need to answer questions concerning your work record or earnings for a particular year.

All Other Tax-Related Documents 

Beyond those listed above, common tax-related documents include all types of Form-1099 and Form-1098 documents, as well as Schedule K-1 documents. As a rule of thumb, these should be retained for a minimum of three years after you file as this is the statute of limitations for an audit where fraud or failure to file is not a concern.

However, for those taxpayers who underestimate their adjusted gross income (AGI) by more than 25%, the statute of limitations extends to six years. What constitutes an understatement is often more complex than simply failing to declare income and so to be completely safe, it is not a bad idea to retain records for this entire six-year period. Finally, if you ever wanted to be a hoarder, this is where you can get a pass from us.  Keeping all your tax returns and the supporting documentation forever is not a completely unreasonable act…but you can go ahead and throw away those church bulletins from the 1970s.

Should you have questions or concerns about recordkeeping, don’t hesitate to reach out. We would be happy to talk through your case and provide any assistance you may need.

Contact the Estate Planning Attorneys at the Law Firm of Christopher W. Dumm