Friday, April 27, 2007


Once someone finds out what I do for a living it is only a matter of time before I am presented with a tax question.

Sort of like old standard about the individual who, upon meeting a doctor at a party, opens the conversation with “Doc, I have this pain…”.

I don’t mind general questions, and most of them are.

During my recuperative stay in Ocean Grove my host asked me a common question, which I will address in this installment of ASK THE TAX PRO.

(Q) How long should I keep my tax returns?

(A) First of all, it is my belief that you should keep the paper copy of your tax returns (Form 1040 or 1040A plus all supporting federal Schedules and Forms) forever. This provides a permanent record of your financial history. You never know when the information on a prior year’s tax return will come in handy for a variety of tax or financial related reasons, or just to satisfy personal curiosity.

The time period for keeping all other records ties in to the fact that the IRS, and the appropriate state tax authorities, has three (3) years from the due date (or filing date if you had any extensions) of a tax return to audit and revise that return (except in the case of tax fraud – then the IRS can go back forever). If you filed your 2003 Form 1040 by the initial April 15, 2004 due date, “Uncle Sam” had until April 17, 2007 to audit it and ask for additional taxes.

I recommend keeping all back-up documentation that supports an item reported or deducted on your tax return for four (4) full years. This includes all applicable bank statements and cancelled checks as well as W-2s, 1099s, 1098s, and appropriate receipts and bills. You can toss all such information for your 2003 tax return in December of 2007.

Hold on to your individual pay stubs for the year until have received the Form W-2 for that year. Reconcile the year-to-date cumulative totals on the last pay stub for the year to the amounts reported on the W-2. If they match you can throw out all but the last pay stub. Keep the final pay stub for the year, with the year-end cumulative numbers, with your tax return documentation for that year.

Certain documentation requires longer holding periods. For investments in stock, bonds and mutual funds you should keep all confirms and other appropriate back-up (such as notices of splits and records of any dividend reinvestments) for as long as you hold the investment plus four (4) additional years. You should keep the confirmation slip or other documentation for the sale or disposition of the investment for four (4) years after the sale or disposition.

Similarly, if you own real estate you should keep all Closing or Settlement Statements for the purchase and refinancing of the property, and documentation of any capital improvements, for as long as you own the property plus four (4) additional years. You should keep the Closing or Settlement Statement or other documentation for the sale or disposition of the property for four (4) years after the sale or disposition.

If you have invested in a limited partnership or “sub-chapter S” corporation, or are a partner in a business organized as a partnership, a “sub-chapter S” corporation or an LLC or LLP, you should keep the annual Form K-1 you receive from the investment or business for as long as you own an interest in the entity plus four (4) additional years, and keep any paperwork related to the sale or disposition of your interest for four (4) years after the sale or disposition.

Receipts and bills for personal expenses that are not related to any items reported or deducted on your tax return can generally be tossed after one year. You can throw out all such bills for calendar year 2006 in January of 2008. You may want to keep bills, receipts and cancelled checks for equipment, appliances and the like for at least as long as these items are covered under warranty.


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