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Keeping Tax Records

Which Tax Records to Keep and Which to Toss

Now that you're done with taxes, it's time to do a little Spring cleaning with your financial documents. Kiplinger advises what to keep and what to toss.

It's smart to keep your tax returns indefinitely. Old returns can provide important background information in a variety of situations — for example, if you're applying for a mortgage, applying for disability insurance or trying to figure out the cost basis of investments. The pages from your return don't take up much space, and the records are easy to digitize, so you don't need to keep the paper versions of your old returns.

Also keep records of your home's purchase price and major home improvements for three years after you sell the home. Most people no longer need to pay taxes on their profits on a home sale: Single filers can exclude $250,000 in profits from income, and married couples filing jointly can exclude $500,000, as long as they've lived in their home for at least two of the past five years. But if you live in the house for less than two of the five years leading up to the sale, your gains may be taxable. In that case, your home-improvement records can substantiate an increase in your tax basis and a lower gain (the cost of basic repairs doesn't count). For more information, see IRS Publication 523 Selling Your Home.

It's a good idea to keep records of stock and mutual fund purchases made in taxable accounts for as long as you hold those investments. The records will come in handy when you sell the shares and must report the purchase price, date of purchase and number of shares involved. Also keep records of any stock or mutual fund dividends you've reinvested so you can avoid paying taxes on them again when you withdraw the money.

Read on for more.

And hang onto Form 8606, on which you reported any non-deductible IRA contributions, until you withdraw all the money from your IRA. The record will help you avoid being taxed on the money again when you take it out in retirement. See Deductible Versus Nondeductible IRA Contributions for more information.

As for what to weed out, the IRS generally has up to three years after the due date of your tax return to begin an audit, so you can toss most of your supporting tax documents — such as canceled checks and receipts — as soon as the three-year period has passed. See IRS Publication 552 Recordkeeping for Individuals for more information about tax records.

You can also toss monthly statements from your bank and brokerage firm after you receive your year-end statements; get rid of ATM receipts and bank-deposit slips as soon as you match them up with your monthly statement; and dump pay stubs after seeing that they accord with your W-2 for the year (but you'll want to save your December pay stub if it shows charitable contributions made via payroll deduction). Dispose of paper copies of your credit card, utility, phone and cable bills as soon as the next month's bill arrives unless you need them for tax purposes (say, if the expenses can be deducted as self-employed business expenses or if you're claiming the home-office deduction). See Tax Tips for Freelancers and the Self-Employed for more information. (You may want to keep utility bills for a few years even if you don't need them for taxes so you can show prospective buyers the average monthly cost of your utilities.)

Shred these documents before tossing them so an ID thief doesn't end up with a goldmine of information about your bank account, credit cards and other personal information. See Your ID-Theft Prevention Kit for more information.

Check out these smart Kiplinger stories:

5 Ways to Spring Clean Your Finances

Toss Paper Files You Don't Need

Create a Digital Archive of Tax Documents

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