11 Tax-Related Documents You Should Never Throw Away
The most important documents of your life aren't always easy to retrieve from their original source or even online. It's up to you to stash your documents for safe keeping.
Major Life Events
Nothing in life can be certain except death and taxes, at least that’s what Benjamin Franklin thought back in 1789 when he was referring to the constitution. What is also certain is that other life events like marriage, divorce, and adoption affect your taxes. That’s why Jill Gonzalez, a tax analyst for Wallet Hub says, “All documents related to life events such as marriage, a death of a spouse, divorce, alimony payments, adoption papers, or custody agreements should be saved.”
The IRS doesn’t need proof you are married or divorced, but if your name changes, you will. “If your marital status has changed during the last tax year, and you want to file your taxes using your new last name, you’ll first need to go to a Social Security office and change it,” says Gonzalez. Per the Social Security Administration, you’ll need one of the following documents to prove your legal name: a marriage document, divorce degree, certificate of naturalization showing a new name, or court order for a name change.
Death of a Spouse
To protect against identity theft, send the IRS a copy of the death certificate. “The IRS will flag the account to reflect that the person is deceased,” says Gonzalez. “A copy of the death certificate may also be sent with the decedent’s final tax return.”
Divorce and Custody Agreements
If you or your ex-spouse plan on claiming any children as exemptions, your divorce and custody agreements should be handy come tax filing time. “If the divorce agreement doesn’t specify who gets to claim the kids, the exemption goes to the custodial parent. In the case of joint custody, the parent who has held the child longer during the tax year will be able to claim the exemption,” says Gonzalez.
The IRS offers tax credits to adoptive parents, so be sure to have adoption-related financial records, legal agreements, and other paperwork handy come April 15. “The IRS may ask for any financial records related to the adoption such as invoices, bank statements or copies of written checks,” says Gonzalez. Here are 32 more things your tax accountant wishes you knew.
If you’ve been audited by the IRS, hang on to the paperwork because believe it or not, you’re not exempt from being audited again. “I had a client who was audited one year and the audited again,” says Anthony E. Parent, Esq., founding partner of Parent & Parent LLP. He recommends keeping tax audit papers forever, because the IRS may not save your previous audit on file.
Property and home documents
In the short-term, the papers related to the sale of your home come in handy if you’re a first-time home buyer as there may be some tax credits. Plus, you can take a deduction for state property taxes paid. In the long term, anything property or home improvement related should be kept handy for audits, or if you make a home improvement that significantly increases the value of your home. These are the 10 things you need to know about property taxes.
Foreign income or investments
“Foreign bank and financial accounts have to be saved for five years minimum,” says Parent. Note that it’s a pretty stiff penalty of up to 50 percent of the account’s value if you don’t report the income, so it’s prudent you have proof by holding onto the documents.
Bank records and receipts
“The IRS relies on bank records, so it is important for them to have access to them if you’re ever put on the spot with an audit,” says Parent. Bank records and receipts are classified as “supporting documents,” that is, they provide documented proof of income and expenses for the IRS. Parent also suggests hanging on to medical records and copies of expenses in the event of an audit.
We’re not pointing any fingers, but if you happen to under-report your income by 25 percent or more or file a fraudulent return and the IRS catches it, you better have the supporting documents and records for the audit. Parent says the IRS will probably ask for the last seven years of supporting documents.
You should never throw away tax returns. While you can request a tax return transcript for up to three years in the past, you’ll be sunk if you don’t have prior years’ tax returns if you get audited or need proof from tax returns for social security benefits. “Technically speaking, the IRS is only allowed to audit the last three years, but there are exceptions,” says Parent. “Some exceptions would be a previous audit, foreign income or investments, home and property records, or if you under-reported your earnings one year,” says Parent. For these scenarios, Parent suggests hanging onto those documents for a minimum of seven years and up to “forever.”
Where do I store all this paperwork?
Thankfully the IRS accepts digital documentation as legally valid and binding as the originals so you don’t have to store boxes of paperwork. Gonzalez highly recommends archiving important documents on your computer. “For those that you can find online, such as different forms from banks or other financial institutions, it’s best you download and save them. To keep things well organized, you should have a tax folder with all pertinent documents on your computer, as well as a backup somewhere else.” Also, to conserve hard-drive memory, Parent recommends saving your documents as PDFs versus taking memory-hogging screenshots of the documents.