Yes, it’s true, San Diego friends… the financial markets look pretty rough as I write this, on top of a pretty rough end of last week. Inflation continues to wreak havoc … and the smartypants quants in Wall Street don’t seem to have confidence that the government or the Fed are making the right moves.

Many of my clients could give a rip about the financial markets (as they’re more concerned with what I have to say about tax documentation), but it affects many retirees, and also small businesses who are connected to or serve public companies. Buckle up friends … we’re not yet out of the woods.

In an encouraging recognition of reality, last week the IRS announced a 4-cent/mile increase in the standard mileage rate for the rest of 2022 bringing it to 62.5 cents per mile. At least that’s one bright spot in the rising gas prices reality we’re living in (albeit, a very tiny spot).

And to continue the IRS’s giving spirit to help out U.S. taxpayers like you, the IRS recently wrapped up its 2022 Dirty Dozen tax scams list… to help you stay in the know and avoid falling afoul of those predators – because it can get really messy to undo the damage of a tax scam. 

If you or someone you know is caught in a mess like that and needs some expert help to find a way out, well, that’s one of the many things we’re here for:
858-549-9666

But one great way to protect yourself (from scam artists… or from when the IRS takes a “special look” into your tax records) is keeping your tax documentation on hand – and for the right amount of time. That way you have a defense when things aren’t going your way.

That doesn’t mean you have to hold on to everything and hold on to it forever. So, let’s jump into what to keep and how long. This might seem very boring to you – until it isn’t.

Tax Documentation San Diego Filers Should Keep and Why
“If you wish to inflict a heartless and malignant punishment upon a young person, pledge him to keep a journal a year.” – Mark Twain

Remember when everybody thought paper (as in “paperwork”) was going to vanish soon? While e-filing and electronic tax documentation is becoming much more normalized, if your filing cabinets look anything like ours at the end of tax-filing season, paper sure is still hanging around. 

But regarding your taxes, how many of those paper records do you actually need to keep? And how long do you need to keep them? And what’s the best way to store them – in case you someday have to prove something you claimed on your tax return? 

The basics of tax documentation

Saving too many paper records is just as bad as not saving any – you’d never be able to find what you need (unless you’re just ridiculously good at keeping them organized – in something other than a box at the back of your closet). You’re looking to hit a balance of complete and adequate records stored neatly. 

Most obviously, keep the state and federal tax returns that you filed (the latter is the IRS Form 1040 or one of its variations). You also want to save anything that backs up what’s on your return, such as the Forms 1099, W-2s, and other income statements. 

You should also keep any 1099-Bs or 1099-INTs that you got from banks, brokerages, and investment firms. If you bought or sold mutual fund shares, stocks, or other securities, keep the confirmation slips or statements. (Should you need these in the future, some may be available online from the institutions’ websites – more on electronic storage in a bit …). 

Other circumstances might require you to keep other records: 

• If you lost your job last year and got Unemployment, keep the 1099-G that reports what you received. 
• Keep records of your federal stimulus payments and IRS Letter 6419 if you got the federal Child Tax Credit. 
• If you itemize your tax deductions, keep credit card receipts (at least until you reconcile them with your monthly statements), invoices, mileage logs, and canceled checks. 
• If you sold a home, you’ll need records that prove what you paid and what you received from the sale. If you sold a rental property, keep the records of the amount you invested in the property and what you deducted for depreciation. And keep your Schedule E, which reports your annual rental income, as long as you own the property.  

A question of time

How long do you have to keep tax documentation? Conventional wisdom has always said seven years. You may not need to keep your tax records half that time. Or you may need to keep them a lot longer. 

The IRS is backlogged like you wouldn’t believe right now – 24 million returns still to go for 2021 – but if there’s no fraud involved in your returns, the statute of limitations (or “lookback”) by the IRS is generally three years. 

Many factors can lengthen that time. If you substantially underestimated your income (usually by 25% or more), Uncle Sam might want to scope your tax records back six years. The same timeframe holds true if you substantially overstated the cost of property to minimize your taxable gain or happened to forget five grand or more in an offshore account. Keep records for seven years if you file a claim for a loss from worthless securities or a bad-debt deduction. 

And be warned: If you failed to file a return or if you filed a fraudulent return, there’s no limit on the time the IRS enjoys to come after you. 

Some tax records are important not for what happened to you financially in the past year but for what might happen to you in the future. If someday you sell a property at a profit, for example, you’ll owe capital gains tax on that profit. Same for other investments, like stocks. You’ll need records to calculate your capital gains. 

Some also advise hanging on to just the 1040 forever – it can come in handy for any number of financial matters much further out than seven years.  

Picture this

You might be tempted to organize this stuff by type – all credit card receipts here, for instance, all 1040s there – but no. Sort and store by year, not category; keep all documents together with that year’s tax return. 

If you have physical files, think about a fireproof safe in your home or a safe deposit box in a bank. (The latter doesn’t offer nearly the legal protection you think it does, by the way, but it’s still better than the bottom of your closet.) Bear in mind too that if you itemize deductions, today’s oh-so-modern register receipts fade unbelievably fast. Take a picture – it’ll last longer. 

While we’re on that topic, why not run those records through your printer/scanner at home and ship them up to the cloud for electronic storage? We can help you find an e-storage provider who offers top-notch security. 

And when finally saying good-bye to any paper files, shred shred shred. 

Like I mentioned last week, I’m here for you during these crazy times, and my team and I will do whatever we can to help you find your way through them. Just reach out:
858-549-9666

Or if you know someone needing some support and guidance on tax matters including tax documentation, share this with them, too. I’m here to serve and love the opportunity to guide San Diego people through the storm. 

In your corner,

Darryl A. Hale, EA, MBA, MST