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IRS record keeping guide (continues...)

Examples of tax records to be kept forever

An example of tax records which are to be kept forever are as follows:

If a tax payer purchased Microsoft stocks at $1000, and the tax payer then reinvested $100 in dividends. Basically, the tax payer takes the dividends in the form of more stock as opposed to cash one year later and then sold the stock for $1050 sale price, gaining $50 ($1050 minus the $1000 purchase price).

If the tax payer had the tax records, then the tax payer would not pay any tax on the transaction and would actually be able to deduct tax of a loss of $50 on the sale ($1100 purchase price including reinvested dividends minus the $1050 sale price). The loss could then be used to reduce other taxable income such as wage or interest.

All tax records concerning real property including purchase an sale information and all improvements should be kept indefinitely. This is so that a tax payer can properly account for all investment transactions and not pay any more taxes than they are required to.

All tax records should be kept even after Congress raised the capital gains tax exclusions on the sale of personal residences in the tax payer relief act of 1997 . While nearly every tax payer will now be able to sell his or her home and not pay any capital gains tax because single tax payers can exclude up to $250,000 of capital gains while married couples filing joint tax returns can exclude up to $500,000 of capital gains. In most cases, a tax payer should not assume that Congress will not change this part of the tax code again in the future

Keep copies of tax returns

Finally keep copies of your tax returns for at least six years along with the proof of filing. For example, send all tax returns by certified mail and request a return receipt.

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