During tax season I often get asked about what tax records should be kept and for how long.

For this week’s post, I’m going to focus on the basics and provide some good general rules of thumb.

For starters, it’s good to know that even the IRS has a statute of limitations. The statute of limitations limits the number of years during which the IRS can audit your previously filed tax returns. Once that period has expired, the IRS is legally prohibited from asking you questions about those returns.

One major exception to this rule is “fraudulent” returns. 

If you file a “fraudulent” return, or don’t file at all, the limitations period doesn’t apply. In fact, the IRS can get you at any time!

But, since I know this doesn’t apply to anyone smart enough to be reading this article, let’s get to the good stuff.

The reasoning behind the statute of limitations is that, as we all know, after a period of years, records can become lost or misplaced and our memory isn’t as accurate as we would hope.

Once the statute of limitations has expired, the IRS can’t go after you for additional taxes, but you can’t go after the IRS for additional refunds, either.

The Three-Year Rule

Generally speaking, the IRS has three years from the date you file your return to assess additional taxes.  Conversely, if you’re looking for an additional refund, the limitations period is generally the later of three years from the date you filed the original return or two years from the date you paid the tax.

A couple exceptions:

• The IRS has six years to challenge your return if it thinks you underreported your gross income by 25 percent or more.
• If you’ve claimed a loss from a worthless security, the limitation period is extended to seven years.

My Suggestion: You Can Throw Away After Seven Years

Although the IRS has three years from your filing date to audit your return if it suspects good-faith errors, I usually tell people to keep their records for seven years for safe measure.  A few extra returns is not going to take up that much more space in your file and it’s good to always be prepared.

That being said, if you’re in your 40’s and you’re still holding on to your tax returns from when you were in college, you’re probably safe now, and can shred those returns.

If you do ever need any tax or financial advice focused on your specific situation, feel free to contact me anytime.

*Please keep in mind that all the information I post on this site is for general purposes only.  I understand that every person’s situation is unique and should be treated as such.  If you would like more information about how something listed in any of my posts specifically affects you, please feel free to comment below, email me, or call me anytime. 

For the past two tax years – 2009 & 2010 – many of us have received the Making Work Pay Credit.

This credit expired at the end of 2010, and was not part of the two year tax extensions congress passed at the end of last year.  You can see this credit on line 63 of the 1040 after filling out and completing Schedule M.

The maximum credit for a married couple filing a joint return is $800 and $400 for other taxpayers.

As with all tax credits, there are some restrictions and limitations, but for the most part, many tax payers have been able to receive this credit over the past two years.

Say ‘Goodbye’

The 2010 tax year is the last year the Making Work Pay Credit will be available on our taxes.

All things being completely equal, if your 2011 tax situation looks like it is going to be the same as your 2010, your refund will go down by $800, if you’re married filing jointly, and $400 for other taxpayers.

Conversely, if you owed additional taxes to the IRS in 2010, and you expect your 2011 taxes to be the same, you will most likely owe an additional $800 if you’re married filing jointly, and $400 for other taxpayers.

Plan Ahead

If you did receive the Making Work Pay Credit in 2010, plan ahead and make the necessary changes so that you will not be surprised next year.

If you do ever need any tax or financial advice focused on your specific situation, feel free to contact me anytime.

*Please keep in mind that all the information I post on this site is for general purposes only.  I understand that every person’s situation is unique and should be treated as such.  If you would like more information about how something listed in any of my posts specifically affects you, please feel free to comment below, email me, or call me anytime.

Do you enjoy getting a tax refund every year?  Do you hate paying extra money at tax time?

I have many clients who love large refunds, and I have some clients who love coming close to breaking even every year.  But no one I’ve met loves paying more after filing their taxes.

Recently, I’ve discussed the potential problems people encounter with tax software programs and how to choose the right tax professional, and here I would like to discuss something else of which we all should be mindful.

If you pay someone to do your taxes, do you judge their performance/expertise based on how much of a refund you get? 

Come on… tell the truth!!  Although we know we shouldn’t, I bet when pressured, most of us would admit that we do.

But guess what?  Paid Tax Professionals know this too!

Most tax preparers know that people will think they’re doing a great job if they simply help them get a large refund, and conversely, they know people will think they don’t know what they’re doing if they don’t.

So most paid tax preparers will try to show you how to get a larger refund.  Makes sense, right?

But here’s the problem:  They usually only tell you to adjust your withholdings!

Every year, when I meet new clients and we discuss the previous tax advice they were given, the most common answer that I hear is, “he/she told me to adjust my withholdings.”

The problem is that adjusting your withholdings has nothing to do with your tax liability.

You may get a larger refund, and it may appear that you’re doing better each year, but you may be paying more to Uncle Sam every year without even knowing it.

The other advice most people receive is to increase their contributions into their 403B/401K/IRA.

This advice is slightly better, and this advice will lower someone’s tax liability in any given year, but there’s another hidden problem most people don’t see:  FUTURE TAXES.

Most people know that all the “tax savings” they’re getting now by contributing to their 403B/401K/IRA will be taxed when they begin withdrawing from their accounts in the future.  However, most people aren’t aware of how much they will pay in taxes in the future, because it’s not an easy thing to calculate.

Do you think taxes will go up in the future?  If you think so, and depending on your specific situation, this may not be the best advice.

So what’s the alternative? 

Talking with a tax professional/advisor who will look at your specific situation, and evaluate your taxes today and in the future. 

Unfortunately, taxes are here to stay.     

So we need to not just think about taxes today and this year, but we need to consider the tax implications for the future as well.

This tax season, I encourage you to find someone who will help you with your tax situation today, and discuss what your tax situation could be in the future.

If you feel you could use some assistance with preparing your 2010 Tax Return, feel free to comment below, email me, or call me anytime.

*Please keep in mind that all the information I post on this site is for general purposes only.  I understand that every person’s situation is unique and should be treated as such.  If you would like more information about how something listed in any of my posts specifically affects you, please feel free to comment below, email me, or call me anytime.

 

 

 

 

1.     Monday, April 18^th – The tax deadline for 2011.

Emancipation Day, a holiday in Washington, D.C., falls on April 15 this year.  Since, by law, the tax deadline cannot fall on a holiday or weekend, the deadline for this year  has been pushed to Monday, April 18^th. 

In case you were wondering – Emancipation Day marks the occasion when President Abraham Lincoln signed into law a bill ending slavery in the District of Columbia.   Lincoln signed the bill on April 16, 1862, more than eight months before he signed the Emancipation Proclamation.

2.      Monday, February 14^th, 2011 – When the IRS will be able to process all returns.

Prior to that date, the IRS cannot accept tax returns for processing for taxpayers who are claiming itemized deductions on Schedule A, the higher education tuition and fees deduction on Form 8917, or the educator expenses deduction. All other returns can be processed immediately.

This delay is due in part to the fact that congress waited until December 17^th, 2010 to make changes to the 2010 tax code.

3.     70,000+  – The number of pages in the federal tax code.

In case you were wondering, the tax code began with 400 pages back in 1913.  Could this be why 82% of taxpayers use a tax professional or tax software?

4.     7.6 billion – The number of hours it takes every year for Americans to prepare their taxes.

Since there is roughly 312 million people in America, that means every man, woman, and child spends 24.4 hours getting ready for tax day.

5.     IRS Commissioner doesn’t file his own taxes.

You know taxes are too complicated when Douglas Shulman, the head of the Internal Revenue Service, gets his taxes done by a professional.