Tax record-keeping tips

Investment account statements contain financial data that a taxpayer will need as long as the stock or mutual fund is owned. On the stock side, there may be splits that change the value of the holding and, therefore, the eventual worth of the stock, which is used to determine the taxable basis.

For mutual funds with reinvested dividends, owners pay tax each year on these earnings. These taxes are used to increase a fund's basis so when the fund is sold, the final tax bill will be less. Without statements, it's easy to lose track of those payments, says Durand, and a fund owner could inadvertently pay double taxes on earnings.

Retirement record requirements

And then there are all those retirement savings plans, with all those different rules.

Contributions to traditional IRAs often are tax-deferred. But sometimes already-taxed money goes into these accounts, too. What happens to your taxes when you reach 59 1/2 and start taking out money?

That depends in large part on your record keeping.

Statements from IRA fund managers should note whether contributions were tax-deferred or already taxed. The financial reports also keep track of the tax-deferred earnings, compounding year after year. These documents can help you make your case to the IRS when it comes time to pay the tax bill, so hang on to them all for as long as you have the account.

IRS Form 8606 also can help track retirement plan taxes. This form, which is filed only in the years that nondeductible contributions are made, calculates the taxable basis of an IRA. File and keep copies of each 8606 with your retirement plan data.

Business considerations

If you operate a small business, from a moonlighting job to a small operation with several employees, dealing with records becomes a bit more complex. But even then, it doesn't have to overwhelm you.

Rudo notes that the IRS generally focuses on self-employed travel and entertainment expenses, scrutinizing returns to make sure all the expenses are really related to the business and can be proven. In these cases, complete and accurate -- but not overdone -- contemporaneous records need to be kept until the audit threshold passes.

Durand adds that, unlike personal bank statements, business financial account records should be kept permanently. Similarly, anyone who has employees should hang onto employment information and related tax returns for as long as the business is running. And don't shred articles of incorporation, company bylaws, stockholder minutes, and trademark and copyright applications.

Pick a system, any system

Once you've identified critical records, the next step is to decide how to keep the data. Electronic bill paying can help keep track of your financial and tax life, but so can a plain old check register, as long as expenditures are entered faithfully.

It doesn't matter if it's a filing cabinet, cardboard boxes or a complex computer program. Organizational expert Barbara Hemphill, CEO of the Productive Environment Institute, says the key is to find your record-keeping comfort level, pick a system and stick with it.

And when it comes to taxes, it's even more important to be proactive in record keeping, says Hemphill, who has been advising folks on ways to get their lives in order for more than 30 years. Start now, she says, rather than waiting until April's tax-filing deadline. Such diligent organization could make any IRS examination easier.

"In any kind of audit, I've found the IRS is more forgiving if you make an honest mistake rather than if you're sloppy or fraudulent," says Hemphill.

But she, too, cautions against going to the extreme. All it takes is a reasonable evaluation of your piles of paper and a little bit of common sense.

"When I began organizing people's homes," says Hemphill, "I found people who had 40 and 50 years of bank statements, but who were not balancing their checkbook."


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