Congratulations! Your 2021 taxes have been filed. So, is it safe now to throw away all those receipts, statements, and confirmations?
Kiplinger reporter Rivan V. Stinson explains in a recent article what you need to keep, and what it’s safe to shred.
“Generally, the IRS has three years from the date you file to audit your return,” writes Stinson. But to be on the safe side, many experts recommend keeping your supporting documents for at least four years in the event you are audited.
Mercer Advisors Senior Wealth Advisor Mari Adam explained to Rivan why in some cases homeowners may want to keep their receipts for even longer. Taxpayers who sell their home can normally exclude $250,000 of capital gains from taxation ($500,000 for married couples).
But to document your cost basis – and get credit for all the upgrades you made – you’ll need a running total of improvements you’ve made to your home, and a pile of receipts to prove it. When you’ve lived in your home for a decade or two, as many long-time homeowners have, coming up with the right documentation can be challenging.
“Clients often panic when they realize they may owe taxes on a home sale and don’t have records of improvements,” Mari told Rivan.
Mari worked with a couple in California, for example, who had invested about $1 million in home renovations over the years but didn’t have the receipts to prove it. Now that the home has been sold, their tax advisor and other advisors are putting in double-time trying to establish what work they did, when they did it, and what it cost.
The Takeaway: Avoid the panicky tax-time document scramble. Open a tax file early in the year, for example, one labeled ‘2022 Taxes’ and start filing away copies of all the documents you’ll need next April 15.
And if you are making improvements to your home, scan your receipts into the file and keep a running total of everything you’ve spent. That can save you thousands of dollars in taxes if rising home prices mean you are lucky enough to sell your home at a profit. And check out Rivan’s article in Kiplinger for guidelines on what to keep – and what to shred – once this year’s tax season is over.