How long to maintain tax records?

The tax season is past us, and a common question put forth by most of our clients is "How long do I need to maintain copies of my tax return and affiliated records?"

In most cases, taxpayers need to keep copies of their tax returns, and all return-related substantiating documents until the period of limitation for the returns runs out. The period of limitations is the time within which the tax return can be amended to claim credits or refunds, or for the IRS to assess additional tax liabilities.

The table below lists the period of keeping records for different scenarios

Additional tax owed	3 years
Does not report Income	6 years
Credit or refund after filing return	3 years from date of filing / 2 years from payment of tax whichever is later
Claim for loss from worthless securities or bad debt	7 years

A general suggestion is to maintain all employment tax records for at least 4 years after the date that the tax becomes due or is paid, whichever is later.

Keep records of all stock and fund purchases, and year-end statements on reinvested dividends and capital-gains distributions.

When claiming depreciation, amortization, or depletion deductions, keep related records for as long as the underlying property is owned. That includes deeds, titles and cost basis records.

Hang on to receipts for major home improvements for at least three years after sale of house property. They may come in handy if one wants to show potential buyers how much has been spent to upgrade the property, and certain home-improvement expenses can be used to lower any tax bill on home-sale profits.

Discard ATM receipts and bank-deposit slips as soon as they match up with the monthly statements. Pay stubs can also be similarly trashed on receipt of the W-2 for the year.

Any year that one makes a nondeductible contribution to a traditional IRA, he / she must file Form 8606 to document those contributions. Then all of those 8606 forms must be held on to until all the money from the IRA is withdrawn, so one won't end up overpaying the tax bill when retirement comes calling.

Although it is recommended that tax returns are maintained for at least six years, the taxpayer can at least have a digital archive as it can provide clues about income and investments and other tax information that might come in handy in the distant future.

The standard IRS recommendation is for paper documents to be cross-cut shredded to effect 5/16 inch-wide or smaller strips, or completely burned. In case of magnetic media, a combination of overwriting and Degaussing, followed by incinerating, shredding, pulverizing, disintegrating or grinding is usually recommended.

To save space, one can scan the records and have them stored electronically. The IRS has accepted scanned receipts since 1997. One just needs to ensure that the scanned or electronic receipts reflect the paper records accurately. The ability to index, store, preserve, retrieve, and reproduce the records must be complete.

For any queries on this article please e-mail info@gkmtax.com for our tax experts or like many of our clients, we can prepare your tax returns for you.

Penalty for under payment of estimated tax

The United States income tax is a pay-as-you-go tax, which means that tax must be paid as you earn or receive your income during the year. You can either do this through withholding or by making estimated tax payments. If you do not pay your tax through withholding, or do not pay enough tax that way, you might also have to pay estimated taxes. If you did not pay enough tax throughout the year, either through withholding or by making estimated tax payments, you may have to pay a penalty for underpayment of estimated tax. How much you owe or have refunded is the difference between your tax less credits you qualify for and what you have pre-paid through estimates and withholding. A lot many taxpayers end up paying more than their tax because they got caught by the Underpayment of Estimated Tax Penalty.

Generally, most taxpayers will avoid this penalty if they owe less than $1,000 in tax after subtracting their withholdings and credits, or if they paid at least 90% of the tax for the current year, or 100% of the tax shown on the return for the prior year, whichever is smaller. There are special rules for farmers and fishermen, people who have household employees and higher income tax payers.

Generally, the payments should be made in four equal amounts to avoid a penalty. However, if your income is received unevenly during the year, you may be able to avoid or lower the penalty by annualizing your income and making unequal payments. The penalty may be waived if:

The failure to make estimated payments was caused by a casualty, disaster, or other unusual circumstance and it would be inequitable to impose the penalty, or

You retired (after reaching age 62) or became disabled during the tax year for which estimated payments were required to be made or in the preceding tax year, and the underpayment was due to reasonable cause and not willful neglect.

You can also get hit with the penalty if you are getting a refund. Let’s say you had a large gambling winning in February but you held off making an estimate payment until the next quarter. Depending on the amount of the winnings and the size of the payment, you could still have to pay the underpayment penalty even if you’re getting a refund.

To avoid paying the Underpayment penalty, you want to make estimates or make sure your withholdings are enough to prevent the penalty. Your tax is your tax but there’s no need to pay more when it’s not hard to pre-pay enough to cover it.

Tax Credits that can boost your refund

A tax credit is a dollar-for-dollar reduction of taxes owed. Some tax credits are refundable meaning if you are eligible and claim one, you can get the rest of it in the form of a tax refund even after your tax liability has been reduced to zero.

Here are four refundable tax credits you should consider to increase your refund on your 2011 federal income tax return:

1. The Earned Income Tax Credit is for people earning less than $49,078 from wages, self-employment or farming. Millions of workers who saw their earnings drop in 2011 may qualify for the first time. Income, age and the number of qualifying children determine the amount of the credit, which can be up to $5,751. Workers without children also may qualify. For more information, see IRS Publication 596, Earned Income Credit.
   
   
2. The Child and Dependent Care Credit is for expenses paid for the care of your qualifying children under age 13, or for a disabled spouse or dependent, while you work or look for work. For more information, see IRS Publication 503, Child and Dependent Care Expenses.
   
   
3. The Child Tax Credit is for people who have a qualifying child. The maximum credit is $1,000 for each qualifying child. You can claim this credit in addition to the Child and Dependent Care Credit. For more information on the Child Tax Credit, see IRS Publication 972, Child Tax Credit.
   
   
4. The Retirement Savings Contributions Credit, also known as the Saver’s Credit, is designed to help low-to-moderate income workers save for retirement. You may qualify if your income is below a certain limit and you contribute to an IRA or workplace retirement plan, such as a 401(k) plan. The Saver’s Credit is available in addition to any other tax savings that apply. For more information, see IRS Publication 590, Individual Retirement Arrangements (IRAs).

There are many other tax credits that may be available to you depending on your facts and circumstances. Since many qualifications and limitations apply to various tax credits, you should carefully check your tax form instructions, the listed publications and additional information available at www.irs.gov. IRS forms and publications are available on the IRS website at www.irs.gov and by calling 800-TAX-FORM (800-829-3676).

Source: www.irs.gov