When Do You Toss Records?

Those boxes of old tax records sitting on a closet shelf or in your attic - want to get rid of them?

Wait at least six years. And keep some forever.

You keep records, gathering dust and taking up space, because the Internal Revenue Service might challenge reported income, deductions, etc. And the burden of proof lies with you - in those boxes.

Retain these records forever:

Proof that you filed tax returns. Keep copies of all returns with supporting schedules. These could be helpful if the IRS loses your return.
Proof of income and deductions for a year you didn't file a return and for any return the IRS might consider fraudulent; the agency has no time limit to audit these.
Proof supporting large bank deposits or major purchases from funds not reported as income. This includes money borrowed and gifts or loan payments received. You don't want the IRS to say the $5,000 finally repaid by your deadbeat brother was taxable income.

Retain these records for six years, and start counting from the returns' due date or date filed, whichever is later:

Proof of all income and deductions on your return including IRS forms W-2 and 1099, canceled checks, receipts, mileage logs, expense reports, appointment books, alimony and child support agreements, police reports of theft, charge card vouchers, diary of gambling winnings and losses.
Proof of rollovers, conversion to Roth IRAs, contributions to and withdrawals from individual retirement accounts and retirement plans. The six years start with the return reporting the final distribution to you.
Proof of cost basis for major assets, including securities. This is important in case of a future sale, rental or casualty loss. For example, consider the sale of a painting for $100,000. To figure taxes, the IRS might estimate you paid $5,000 for it 10 years ago. You would then owe taxes on $95,000. But if you had proof showing you paid $90,000, you would owe taxes on only $10,000. Big difference. The six years start with the return reporting the asset sale.

Major assets require taxpayers to keep certain records as proof of cost basis:

For stock - cost, brokerage and mutual funds annual reports and records of stock dividends, reinvested dividends and stock splits.
For rental real estate or other depreciable property - date acquired, cost, improvements and depreciation claimed.
For assets given to you - a record of the donor's basis.
For assets inherited - inheritance and estate tax returns or other proof of value at the time of the inheritance.
For your home - a record of purchase price, closing statement and cost of improvements including landscaping, new room, additions on all your homes. In the past, each time you sold a home, you deferred the gain by purchasing a more expensive one. This gain deferral catches up with you when you finally sell that last home. You determine its gain by adding all the prior deferred gains to the gain on the last home. If these gains exceed your exemption amount, you owe taxes. These records are also necessary to prove the home's basis for such things as a casualty deduction, rental of part of it or use of some of its space as an office. The six years start with the return reporting the sale of your last home.

Don't think of records as dust catchers. Think of them as life preservers for saving taxes.

The moral: The only thing sadder than a lost lover is a lost deduction.