How Long to Keep Tax Records
This is a great time of the year to get rid of outdated files and to organize your records in preparation for filing your tax return in the spring. You should be receiving your year-end mutual fund and brokerage statements by the end of January, along with W-2 and 1099 tax forms reporting your income and interest for 2010.
Review your year-end statements to make sure they accurately reflect the monthly statements you received from your bank, broker and other financial institutions. Then you can toss the monthly statements. Keep those year-end statements in your tax files for at least three years after the due date of your return (or six years if you're self-employed).
You should keep records of your stock and fund purchases for as long as you hold those investments, however. You'll need to report the date, number of shares and price paid on Schedule D to establish your basis when you finally sell a stock or fund. You'll only pay tax on the profits above the basis amount, or you can use a loss to offset investment gains and up to $3,000 per year of ordinary income. Also, hold on to year-end statements that show reinvested dividends and capital-gains distributions, so you don't end up paying taxes on the same money twice when you sell the shares.
It's also a great time to de-clutter the rest of your financial files. Although it's recommended that you keep your tax returns for at least six years, you may want to hold on to them forever (or at least a digital archive of them), because they can provide clues about your income and investments and other tax information that might come in handy in the distant future. You can still weed out and toss supporting documents, such as canceled checks and old receipts, three years after the due date
of your return (that's usually how long the IRS has to audit your return, unless you've significantly underreported your income). If you have any self-employment income, keep your receipts for at least six years.
You may also want to hang on to receipts for major home improvements for at least three years after you sell your house. They may come in handy if you want to show potential buyers how much you've spent to upgrade the property, and you may be able to use certain home-improvement expenses to lower any tax bill you might have on your home-sale profits. You probably won't pay taxes on the sale of your principal residence unless you've lived in it for less than two years, you rented out part of it, or your profit on the sale exceeded $250,000 if you're single, $500,000 if you're married.
Trash your ATM receipts and bank-deposit slips as soon as you match them up with your monthly statement. Ditch your pay stubs as soon as you receive your W-2 for the year. And you can also toss paper copies of your credit-card, utility, phone and cable bills as soon as the next month's bill acknowledging your last payment arrives (unless you need to keep the bills for tax purposes -- if you deduct home-office expenses, for example). You may also want to hold on to your utility receipts if you plan to sell your house soon, so you can show prospective buyers how much your utilities tend to cost.
Any year that you make a nondeductible contributions to a traditional IRA, you must file Form 8606 to document those contributions. Then hold on to all of those 8606 forms until you withdraw all the money from your IRA, so you won't end up overpaying your tax bill when you start to take out the money in retirement.Source: finance.yahoo.com