Records storage simplifies tax responsibilities

The federal income tax system is a complicated organization, but it’s one with which all taxpayers must contend. Between payroll deductions, estimated taxes, exemptions, deductions, credits and more, it’s easy to get confused. The problem with confusion, in this case, is that it can sometimes lead to fear – and particularly, fear that everything won’t be accounted for properly. If the Internal Revenue Service should ever come knocking, it’s important to be prepared to answer for the years of taxes that already have been settled.

While there isn’t space here to go into detail on every tax-related document, the following information should provide an idea of some of the paperwork that taxpayers might want to retain. The length of time it is necessary to keep a document depends on the action, expense or event that the document records. In general, records should be kept that support income or a deduction on a tax return until the statute of limitations for that return runs out. This statute provides that taxpayers generally have three years after the date the return was filed to make changes to the information and file an amended return, but there are exceptions. Here are some of the forms that will come with tax season:

Form W-2. Taxpayers who receive paychecks are likely familiar with this document, which reports salary and the federal, state and local income taxes withheld. The W-2 form also shows how much the taxpayer contributed to an employer retirement plan, if applicable. In case some earnings are missing when benefits are applied for, taxpayers should keep all W-2s until it is time to start drawing Social Security.

Form 1099-INT. This form reports interest earned on investments during the year from sources such as certificates of deposit, bank deposits, taxable bonds and money market funds. Taxpayers are required to report interest earned even if this form isn’t received. Generally, these forms should be kept for three years after the date the return is filed.

Form 1099-DIV. This form reports any dividends received during the year from investments such as stocks and stock mutual funds. Even if dividends are reinvested into additional shares, those dividends must be reported, and taxes must be paid on them. In general, these should be kept for three years, but each time dividends are reinvested, it creates a new lot of shares with a new cost basis. For this reason, records of all dividend reinvestments should be kept as long as the shares are owned. This information is necessary in order to accurately figure gain or loss when the shares are sold.

Form 1098. For homeowners, this document reports interest paid on a home mortgage, and savvy taxpayers know that means a deduction. It should be fine to keep these forms on file for three years.

In addition to the numbered forms taxpayers are familiar with, there are other documents that may need to be filed away for safekeeping. According to www.irs.gov, here are some additional guidelines:

• Retain records related to an asset for as long as that asset is owned, plus three years following its disposition.

• If securities are acquired in exchange for other securities – for example, in a merger, spinoff, splitoff, refunding or conversion – hold on to the records related to the old securities for as long as the new securities are owned plus at least three years following the disposition of those securities.

• If a capital loss is being carried forward, hang on to all tax returns until the loss is completely deducted plus three years following the filing of the return that includes the deduction of the last portion of the capital loss carryover. Remember this rule for children’s accounts, too.

Consult tax or legal advisers for questions regarding specific situations.

Timothy M. Reese is senior vice president-investments with A.G. Edwards & Sons Inc. in Springfield. He may be reached at timothy.reese@agedwards.com.[[In-content Ad]]