Tax record-keeping tips
By Kay Bell • Bankrate.com

Diamonds are forever, they say, but when it comes to tax records experts say there's no reason to hang onto every slip of paper for years.

There are limits
When it comes to tax-related documents, you should hang on to records that help you identify sources of income, keep track of expenses, determine the value of property, prepare tax returns or support claims made on those returns. However, common sense -- as well as storage space -- should be your guide.

"We get people looking at boxes of stuff in their basements and ask, 'Can I toss it?'" says Linda Durand, a CPA with McQuade Brennan in Washington, D.C. "A lot of it, they can."

The rule of thumb for tax papers is; hold onto them until the chance of audit passes. Usually, this is three years after filing. But if the IRS suspects you underreported your income by 25 percent or more, they gets six years to check into your tax life.

That's why most accountants advise taxpayers, even those who are meticulous filers, to keep tax documents for six to 10 years.

Use it or lose it
This means 1040 forms and any accompanying tax schedules, along with the documents supporting the return, such as W-2s, 1099 miscellaneous income statements and receipts or canceled checks verifying tax-deductible expenses.

"Anything that you need to do your taxes, hang onto it," says Saul Rudo, a tax attorney with the Chicago firm Katten Muchin Rosenman LLP.

But don't go overboard. If you used something to claim a deduction, keep it. If not, shred it. For example, says Rudo, all those medical bills are useless -- and just taking up space -- if you didn't accumulate enough to meet the deduction threshold.

Some items, however, have a longer shelf life. These generally are assets that a taxpayer will eventually sell, triggering a tax bill. So if you have a pension plan, own a home or invest in the stock market, tax pros recommend keeping these records indefinitely. Or at least until three years after you dispose of the asset.

Housekeeping -- and selling -- records
For most taxpayers, the biggest asset -- and potential tax bill -- is a home.

While the tax rules for home sales have changed in recent years, meaning sale profits don't automatically face IRS charges, any paperwork relating to a residence should be kept for as long as the home is owned.

Single home sellers now can net capital gains of $250,000 (double that for married couples) before owing the IRS. To determine whether sale profits fall within the tax-free limits, the seller must accurately establish a residence's basis. That means that records related to a home's value -- settlement papers and receipts for improvements and additions -- are critical.

And if you sold a house before May 7, 1997, that could affect your current home's basis. With home sales back then, taxpayers were able to defer tax on any gain by using the profit to purchase another home and filing IRS Form 2119. If the home you're now selling is the one your pre-1997 sale proceeds were rolled into, Durand says that you'll need that information -- and those old forms -- to figure your current property's basis and any potential tax bill.

Taking stock of investments
Fast on the heels of home sales as tax triggers (and record-keeping headaches) are stock transactions.

"A couple of years ago, it was harder for people to invest so a lot were more conservative and went to a bank for a certificate of deposit," says Durand. "But with online trading, people are investing more. Keeping track of a CD or two wasn't that difficult, but when you move on to stocks, the tax record keeping becomes critical."

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