Do you need to file a federal tax extension?

If you are like me, then you probably haven’t filed your federal taxes yet. I don’t really have  an excuse, other than a full plate. I put it off until the weekend, but then something else comes up that is much more fun. But the April 15th tax deadline is fast approaching and it’s time to get down to business. If you haven’t yet filed your taxes you should probably start considering whether or not you need to file a tax extension.

Filing a Federal Tax Extension is Free and Easy

Request a federal tax extension if you aren’t ready to file!

Filing a request for a federal tax extension gives you an extra six months to file your income taxes, and the best part is it is easy and will not cost you a penny. The deadline for filing a tax extension is April 15, the same deadline for filing your federal taxes and making your income tax payment.

The only downside is that an extension of time to file does not give you an extension to pay your federal tax bill. If you owe the IRS money for your income taxes you will have to pay at least 90% of that balance when you file your tax extension request, otherwise you may owe penalties and fees.

Use Tax Form 4868 to File an Extension

Before filing for a tax extension you will need to have a rough draft completed of your tax return. You will need to fill out and file tax form 4868 and send it to the IRS. Form 4868 is relatively easy to complete, as it is only one page long. You will fill out your name, address, social security number, your estimated tax liability, your tax payments, your balance due, and the amount you are paying.

You can use many tax preparation software programs to e-file this form, including TurboTax, H&R Block at Home, and more. These programs offer step-by-step instructions for completing the tax extension and will save your progress if you use the program when you file your taxes. They may charge a fee for the software, but in my experience, using a guided software program is much easier than trying to do taxes by hand.

You can also use the IRS Free File Fillable Forms or download form 4868 from the IRS website, print it, fill it out, and send it in. Don’t forget to include your payment if you owe federal taxes.

For those that are without Internet access, or do not have a printer, you can pick up the Form 4868 at a local IRS office, Post Office, Library, or you can call 1-800-TAX-FORM (1-800-829-3676) to file a tax extension.

Tax Deadline Extensions for Military Members

Those that are military members may qualify for an even longer extension, especially if they were serving in a tax free zone for either the current year or the previous year. Some American civilians working overseas may also qualify for a longer extension.

Depending on your situation you may qualify for a military tax deadline extension due to a deployment, service in a tax free military zone, or other military qualification. Some of these extensions are automatic, but others require you at least notify the IRS of your situation. These military tax deadline extensions qualify you for an extension for both filing your federal taxes and making your federal tax payments. In many cases the deadline extension is automatically set at 6 months, but it may be longer if you are currently deployed overseas.

Free tax preparation for military members: Remember – many military members and their family members are eligible for free military tax preparation. Be sure to check your base military tax center for more information about applying for a federal tax extension.

What if You Don’t File a Tax Extension?

Form 4868 is due by April 15th along with the appropriate amount due, if applicable. Once the tax extension form has been filed, a tax payer then has until October 15 of that same year to have your taxes completed and sent in. If you do not file your taxes by either due date, you may then be subject to penalties, fees, and in more extreme circumstances, jail time.

If you cannot make your estimated tax payment by the April 15th deadline, you should call the IRS; often they will work out a payment arrangement with you for large amount if it will cause a financial strain.

Important information about federal tax deadline extensions:

• Deadline to file extension: April 15
• Deadline to file federal taxes with extension: Federal Tax Deadline with Extension, October 15.
• Income tax payments due: April 15 (at least 90% of amount owed is due)
• Tax extension form used: Form 4868
• File tax deadline extensions with the following software programs: TurboTax, H&R Block at Home.

As if we didn’t have enough fraud episodes to worry about, there’s a growing trend in income tax fraud. A thief will use your income tax return to steal your identity – and sometimes a whole lot more.

Identity theft and fraud are messy enough by themselves, but when you add complications with the Internal Revenue Service to the mix, things get really scary, really fast!

How Does Tax Return Fraud Work?

You may be wondering why anyone would want to file your income tax return as part of a scheme to still your identity – after all, it’s both more complicated and time-consuming than simply stealing a credit card or a bank account statement and using that to some advantage. But income tax fraud is identity theft with a twist, and one that can be very profitable for the thief.

In tax fraud, the thief obtains your name, address, and Social Security number, then files a tax return as if he were you. The fraudulent return is filed very early in the year, well before you are likely to file. In preparing the return, the thief will often create bogus W-2 forms that will show excessive withholding in order to create a very large refund. The refund can be direct deposited into the thief’s bank account, which he will then shutdown shortly after tax season – or his enterprise – comes to an end.

The thief can make many thousands of dollars by filing multiple income tax returns on different taxpayers in a very short amount of time. And if he chooses, he can use your name, address and Social Security number to find other ways to profit from the theft.

The beauty of this fraud for the con artist is you will generally be unaware of the theft until you file your return. You file your tax return then wait for a response from the IRS – only to have the IRS deny your refund claim because someone else has already filed using your information. By the time you learn of this, the thief is long gone. Other types of fraud, like stealing your credit card number, may be caught very quickly by the credit card industry’s servers and at the end of the day it doesn’t cost you anything. On the other hand, this fraud can cost you thousands of dollars and a lot of pain in dealing with the Internal Revenue Service.

How to Know If You Are a Tax Fraud Victim

If you are a victim of tax fraud one of the first signs is that you will not be permitted to file your tax return electronically. The IRS will report that a return has already been filed under your Social Security number.

If, according to your real tax return, you actually owe money you may not find out about the tax fraud until you’re contacted by the IRS directly. The letter may indicate several different scenarios, including the obvious issue that tax returns were filed under your name and Social Security number for the same year, or that there is a discrepancy resulting in a greater tax liability for you.

In some cases, the thief will use your tax return to establish identity for employment purposes. If this is case, you may receive either a W-2 or a 1099 from an employer that you have never worked for. The IRS may also contact you indicating you have received wages from these employers.

What To Do If You Think You are a Victim of Tax Fraud

If you suspect tax fraud, the more quickly you move the better it will go for you. The individual facts of your case will contain different variables, but there are three steps that you should take as soon as you become aware of the problem.

File a police report.

You will file a police report with your local police department, just as you would do for a more ordinary case of identity theft. The report will serve at least three purposes:

• It will create an official record of the event,
• It will establish a firm date of discovery on your part, and
• It will give you an official document from a recognized legal authority that will help you in moving forward at other steps in the process.

It’s important that you file this report immediately, as it will also help your case with both the IRS and with the credit reporting agencies.

Contact the IRS.

Contact the Identity Protection Specialized Unit of the IRS (or by phone at 800-908-4490). They will direct you to complete Form 14039, IRS Identity Theft Affidavit to get the process going.

Even though someone else has collected a refund under your identity, you will likely get your true refund as the IRS will not hold you to blame due to a criminal act undertaken by someone else in your name.

Contact all three credit bureaus.

The fact that a tax refund has been claimed from your name is only one possible scenario for tax fraud. Even if you clear up everything with the IRS, you’ll still have the matter of your outstanding Social Security number in the hands of the thief. This will be a long process that will begin with your contacting all three credit repositories – Trans Union, Equifax and Experian. You will have to report the theft of your identity, as well as to ask for a notation that no credit can be obtained without contacting you directly (it’s a good idea to put a credit freeze or fraud alert your credit). This will prevent the identity thief obtaining credit in your name.

After that, you can assess how far the thief has gone in using your identity, and what other steps may be necessary to restore your identity.

Don’t relax after contacting the IRS.

It’s extremely important that you take action the moment you become aware that you may be a victim of tax fraud. Never, ever ignore this simply as a refund grab, as it can lead to much bigger problems later. There would be nothing worse than having to deal with tax fraud with the IRS, then having to turn around and once again try to clear your name with a set of financial institutions that have been scammed by the thief that is using your identity. Identity theft can take weeks of time to clean up in order to your name. Don’t stop with just talking to the IRS; make sure you stay on top of the other facets of identity theft as well.

Intuit, the makers of financial products like TurboTax and Quicken, just announced they have released TurboTax Military Edition. This tax software is designed specifically for military members, and as far as I know, is the first of its kind!

Anyone who has ever served in the military knows how complicated military pay and benefits can be. The servicemember’s base pay is only part of the story, with servicemembers also earning a variety of nontaxable pay and benefits such as BAS, BAH, incentive pays, tax free combat zone pay, and more. In addition, many servicemembers may have more complicated returns because they (or their spouses) may have to file more than one state return, based on their state of residency, or because they have moved at some point in the previous tax year.

When you add all this up, it can make for one fairly complicated tax return!

I’m happy to see TurboTax took notice of the complexities many of our servicemembers face, and also created a solution. Let’s take a look at TurboTax Military Edition’s features:

TurboTax Military Edition Review:

TurboTax Military Edition was created specifically for military members and covers common topics that affect military members’ tax returns. The program works by guiding the military member through a series of questions designed to maximize your return. The questions will cover many issues military members may not know could affect their tax returns, such as state of residency, filing in multiple states, combat pay questions, tax free benefits such as BAH and BAS, and deductions for uniforms, permanent change of station moves, dependents, and special tax provisions for earned income tax credits.

Note: TurboTax Military Edition is free for junior enlisted personnel, rank E-1 to E-5, through Oct. 15, 2013.

Here are some Military Tax Filing Tips from TurboTax:

• Combat Pay – Pay received in combat zones is exempt from federal taxes.
• Special Provisions for Earned Income Tax Credit (EITC) – Military members can elect to use non-taxable pay in order to be eligible for the EITC credits. (this can be a substantial savings!).
• Moving Deductions – Active duty servicemembers may be able to deduct reasonable un-reimbursed moving expenses if the move is for a required PCS.
• Travel Deductions – National Guard and Reserve members may be able to claim unreimbursed travel expenses if they travel more than 100 miles away to perform required duties.
• Uniform Deductions – National Guard and Reserve members may be able to deduct the cost and maintenance of uniforms if they are not allowed to wear certain uniforms when off duty.
• Waived Penalties – If a military member is called to active duty and it causes financial hardship, they are able to waive the 10% penalty tax for early withdrawal from an IRA or other retirement account.
• Job Search Expenses – Military members transitioning to civilian life may be able to deduct job search related expenses such as travel, resume preparation, and outplacement agency fees.
• Charitable Donations – You can claim charitable donations automatically deducted from your paycheck.

Based on personal experience, I would also like to add that military members should consider:

• Retirement and investment contributions: Contributions to the Thrift Savings Plan, IRAs, and other retirement or investment accounts may be affected by tax free income earned in combat zones.
• Bonuses, incentive pay, and other benefits should also be considered when filing your tax return with TurboTax or any other software program.
• Guard and Reserve members may have other deductions in addition to the travel expenses listed above.
• Filing deadlines: Military members who are serving overseas may be eligible for a free tax deadline extension due to their overseas service.

Overall Impression

I’m very happy a leading tax preparation software company stepped up and created this software program. There are millions of military servicemembers around the world who have complicated tax returns. There are many ways servicemembers can file their return for free, but so far as I know, this is the only program I know if that is specifically designed for military members. And that is the key point that makes this program so valuable to servicemembers: you can’t take a deduction if you or your tax preparer don’t know about it.

Learn More – and Get a Limited Time Discount

You can learn more at the TurboTax website. For a limited time, TurboTax Military Edition is free for junior enlisted personnel, rank E-1 to E-5.  You can prepare and file your federal and state tax returns with TurboTax Military Edition for free, through Oct. 15, 2013. Discounted prices are available for E-6 to E-9 & Officers through Feb. 14, 2013.

Free and discounted for a limited time: Click this link to get the limited time TurboTax Military Edition offer.

Every year, millions of American taxpayers mark April 15th as the deadline for filing their income tax return.  While the vast majority of taxpayers meet this deadline, it is actually possible to request an extension to file your tax return.  For those taxpayers, time is just about up to get 2009 taxes filed.  The final deadline for those who requested an extension is October 15th.  Here we review the process of requesting an extension and what happens if you miss the final deadline.

How do you get a tax deadline extension?

File your tax return by October 15th if you requested an extension

Taxpayers who know they will be unable to make the April 15th deadline for filing their income tax can request a six-month tax deadline extension by filing Form 4868 by the April 15th deadline.  Once the IRS receives your extension request, the deadline for filing your taxes is pushed back to October 15th.

Military extensions may extend beyond October 15th. While the majority of US tax payers are required to file by the October 15th deadline, some military members may be eligible for an automatic extension if they were deployed to a tax free combat zone for part of the previous or current tax year. There are several rules for this extension, so be sure to visit the IRS website for specific information.

Note: According to the IRS, this extension may “also apply to individuals serving in the combat zone in support of the U.S. Armed Forces, such as merchant marines serving aboard vessels under the operational control of the Department of Defense, Red Cross personnel, accredited correspondents, and civilian personnel acting under the direction of the U.S. Armed Forces in support of those forces.”

Why File an Extension?

In most cases a person files for an extension when they have a tax liability that they owe, yet are unable to pay by the April 15th deadline.  It is important to note that just because you are granted extra time to file your taxes, you do not get an extension for paying taxes owed.  When you request an extension to file, you will avoid the penalty for failing to file, however you will still be held liable for any taxes that are owed.  Taxes owed that are not paid in full by April 15th will accrue interest and penalties until the time at which they are paid in full.

What You Need to Know about the October 15th Deadline

If you have requested an extension, it is very important that you file your taxes on or before the final deadline.  The IRS has already granted additional time to prepare your tax return and any filers who miss this extended deadline will be subject to a 25% failure to file penalty.  For this reason it is imperative that anyone who has not yet filed to get their taxes in order and filed before the deadline passes.

Options for Those Who Owe Back Taxes

If you do not have the money to pay taxes owed by the deadline, consult with a tax professional to learn what options are available to you.  Again, the most important thing to remember in this situation is that an inability to pay cannot justify not filing your taxes by the established deadlines.  The IRS views failure to file as a serious offense, which may be punishable by one year in jail and a fine of $10,000 per year.  To avoid this, you need only file your taxes in a timely manner.  A tax specialist will be able to help you navigate the many options available to taxpayers who owe taxes but are unable to pay in full.  By filing on time, you reduce the penalties and fees and possible jail time that results from failure to file.

Understand There Are No Other Extensions

October 15th marks the deadline for filing extended tax returns. There are no additional extensions offered to individuals who fail to file by October 15th, except those noted above regarding combat zone tax extensions.  If the IRS does not receive your tax return by the deadline, they may file a return for you.  Understand that when the IRS files a “Substitute for Return”, you are not off the hook for taxes owed.  Any tax liabilities owed remain your responsibility and will grow over time until the issue is addressed and resolved. See more about penalties for not filing taxes.

The tax deadline is April 15th in most years, unless that date falls on a holiday or weekend. In that case, the tax deadline will fall on the next business day. That is the case this year, with the tax filing deadline landing on April 17th (the 15th was on Sunday, and the 16th was Emancipation Day in Washington, DC). Hopefully the extra two days gave you enough time to finish your taxes and get them filed in time. If not, then I strongly suggest filing a tax extension, otherwise, you may owe the IRS stiff penalties or fees for filing your taxes late. Let’s look at a couple situations and how they might work out for different tax filers.

What Happens if you File Your Taxes Late?

Not filing taxes can result in stiff IRS penalties

There are two classes of tax payers when it comes to late filers. Those who owe the IRS money, and those who are owed money by the IRS. If you are owed money by the IRS, then you don’t have as much to worry about if you file late. You won’t receive your refund in a timely fashion, but you will only have yourself to blame. On the other side of the equation are those who owe the government money. If you file late, you may be subjecting yourself to penalties and fees.

Failure to File and Failure to Pay Penalties

The most important thing you can do is file your taxes, even if you can’t pay them right away. The reason is because the failure to file penalty is usually worse than the failure to pay penalty. Because of this, it’s usually best to file, then work with the IRS to figure out a payment schedule or other arrangement.

Failure to file penalty. The penalty for filing your taxes late is usually 5% of the tax liability, per month, until the taxes are filed. The cap for the failure to file penalty is 25% of your unpaid taxes. The clock starts rolling the day after the due date your return was not filed. If you wait at least 60 days beyond the due date or extended due date, the minimum penalty you will pay is the lesser of $135 or 100% of the unpaid taxes. (Keep in mind, this is the minimum penalty).

Failure to pay penalty. Not paying your taxes can also bring about some hefty penalties and fees. Not paying your taxes by the due date usually results in a penalty of ½ of 1 percent of your unpaid taxes for each month or part of a month after the due date that the taxes are not paid. This penalty can accrue to as much as 25 percent of your unpaid taxes.

The IRS lists some additional facts about penalties.

What Happens if You Don’t File Your Taxes?

The failure to file and failure to pay penalties both assume you will pay your taxes within a reasonable time frame. If you are a few months late, chances are good that you will only be subjected to penalties – assuming your tax return checks out fine.

The IRS may take a deeper look into your tax return and determine if you owe underpayment penalties. These include (from least severe to most severe) a Frivolous Return, Negligence, Civil Fraud, and Criminal Fraud (tax evasion). At the low end of the scale, you will be subjected to additional fees on top of the late penalties and fees mentioned above. At the high end of the scale, you could face jail time. Read more about potential penalties for not filing.

File a Tax Deadline Extension if You Will Be Late

If you know you will file your taxes late, then do yourself a favor and file an extension. It is free, and easy to do – just fill out a simple form and filie it electronically, or mail it to the IRS. Once you file your deadline, you have until October 15th to file your taxes. Keep in mind that if you owe money to the IRS, that is due by the April 15th deadline (17th in 2012). You can get around owing additional fees if you pay at least 90% of your tax bill by the April deadline.

Military Members May Be Eligible for a Longer Extension

Some military members may be eligible to extend their tax deadline if they served in a combat zone in the previous or current tax year. Here is an FAQ from the IRS website which covers some of the common questions about this benefit. It’s important to note that this extension will be approved, but you should notate this when you file your taxes. This additional military extension can help you avoid the failure to file and failure to pay penalties, provided you file your tax return by your new tax deadline, as determined by your extension eligibility.

Tax payers who submitted their tax returns early this year may have to wait a little longer than anticipated to receive their tax refund. The IRS recently announced there are delays in tax refunds this year while they put new anti-fraud measures in place on their computer systems. As of right now, the delays are expected to cost tax payers around a week or longer than the scheduled tax refund dates originally announced by the IRS.

Your Tax Refund May Be Late

The new safeguards put in place by the IRS are designed to better screen tax returns filed electronically and help the IRS combat identity theft fraud and other fraudulent tax refund scams. These thefts cost the government hundreds of millions of dollars each year, and can tie up tax refunds for months while the IRS investigates the fraud.

Who is affected by the tax refund delays?

The IRS is currently stating this is a system wide computer update which affects all tax returns filed before January 26th, regardless of who filed, how they filed, or which type of software they use. What this means to the tax payer is that contacting your accountant of software provider won’t do anything to speed up your return, since this is on the IRS side of the house.

As of right now, the delays are only affecting tax payers who filed their tax returns before January 26, 2012. Taxpayers who filed their returns on or after January 26th should still receive their tax return according to the IRS refund schedule.

What to do if your tax refund is delayed

The first thing to verify your tax return was accepted electronically, and verify the date your tax return was accepted by the IRS. If you filed your tax return manually, then you may or may not be affected since it takes awhile for the IRS to enter the returns into the computer (this is done by hand and can take some time depending on the backlog of returns the IRS is working through).

So far, the IRS has stated this only affects people who used E-file during the first week tax returns were being affected. If the date you filed your tax return is among those affected, then there probably isn’t much you can do except wait it out.

The next thing to do is visit the IRS page, Where’s My Refund page, to verify your tax return will be late. You may also be able to check on your refund date via your tax return software, or your accountant may be able to offer assistance in verifying dates.

If your tax return is being delayed for another reason, then it may be a good idea to contact the IRS. It is possible there was an error in your tax return or there may be another problem holding up your refund.

Photo credit: MoneyBlogNewz

If you count yourself among the millions of Americans who file your federal taxes electronically using a software program or IRS E-File, then you are probably wondering when you will receive your federal tax refund. Thankfully, the IRS is one step ahead of you – they release an E-File schedule each year that lists when you will receive your tax refund.

Learn how military members can file taxes for free.

When you receive your refund depends on how and when you file.

IRS E-File Schedule for Check Refunds and Direct Deposits

The following table was released by the IRS (source) to help tax payers know when they should receive their tax refund. It works like this:

• Use the left hand column to look up the date your tax refund was accepted
• Use the middle or right column to look up when you should receive your refund (depending on how you requested your refund – direct deposit or paper check).

How to use this chart: If you filed your taxes with E-File, you should receive a confirmation that your tax return was accepted by the IRS. This date will go in the left column. If you didn’t file your taxes electronically, then this chart may not be useful for you for two reasons: you won’t have a confirmation date regarding when your tax return was accepted, and paper tax returns are manually entered by IRS employees, so the process takes longer.

You will also note that this chart covers dates beyond the traditional filing date. If you file after April 15, 2012, then you should file a tax extension request. It’s simple, and can potentially save you a lot of money in penalties. Note: Some military members may be eligible for additional tax deadline extensions if they were deployed or served overseas during the tax year.

*Please see note at end of article regarding tax refund delays.

Keep in mind it may take a few days for your financial institution to make your deposit available to you, or it may take several days for the check to arrive in the mail. Keep this in mind when planning to use your tax refund. The IRS states to allow for 5 additional days for the funds to become available to you. In almost all cases a direct deposit will get you your tax refund more quickly. Another interesting point is that the IRS published July 4th as an automatic deposit date, which is a national holiday. You may experience delays if your refund was scheduled to be deposited on that date.

Refund Schedule for Extensions and Amended Tax Returns

The refund schedule should be the same if you filed for a tax extension, however, there is no official schedule for tax refunds for amended tax returns. The above list only includes dates for e-filing an original tax return. Amended tax returns are processed manually, and often take 8-12 weeks to process. If you do not receive an amended tax return refund within 8 weeks after you file it, then you should contact the IRS to check on the status.

How to check the status of your tax return

You should be able to check the status of your tax refund roughly 72 hours after your receive confirmation form the IRS that they have received your tax refund via E-File. The best way to check the status of your federal tax refund is to visit the Where’s My Refund page at the IRS website, or, call 1-800-829-1954, or 1-800-829-4477, or 1-800-829-1040 and inquire about your tax return status with an IRS a customer service representative.

Get a Larger Tax Refund Next Year

If you want a bigger tax refund next year, then there are a few ways you can increase the amount of money the government will give you as a tax refund. One of the easiest ways is by opening a Traditional IRA, which allows you to deduct up to an additional $5,000 on your taxes each year (up to $6,000 if you are age 50 or older!). You can open an IRA in a variety of locations, including banks, brokerage firms, independent advisors, and more. If you are looking for a great place to compare different options, then I recommend visiting the Mint.com IRA Center, where you can compare various IRA options.

Update: IRS Announces Some Tax Refunds Will Be Late

The IRS recently upgraded their computer systems to prevent tax refund fraud. This only affects people who filed before January 26 of this year. Find out if your tax refund will be late.

Do you owe estimated taxes or self-employment taxes? You might actually find that you are responsible for paying estimated taxes, but you aren’t aware of it. Let’s give a quick overview of who owes estimated taxes, a look at the estimated tax schedule, and how you can pay them.

Who owes estimated taxes? If you are a salaried employee or hourly worker, chances are your employer withholds your taxes from your paycheck. But if you have small business income, freelance income, or income from other sources, you may not have had taxes withheld and you may owe estimated taxes. There are other situations when you may owe estimated taxes, so check with a tax professional if you are in doubt. You may also be required to pay self employment tax, which is another issue entirely.

Estimated tax schedule

Do you owe estimated taxes?

Estimated taxes are due 4 times per year. They are often referred to as quarterly estimated taxes, even though the payments are not spaced exactly 4 months apart. Here are the estimated tax deadlines:

• April 15th
• June 15th
• September 15th
• January 15th

Just a note about the estimated tax dates: Notice the January deadline covers the final quarter of the year, and the April 15th deadline is for the first quarter’s income. So many freelancers and self-employed individuals have twice the reason to dislike April 15th – it’s the deadline to file their annual taxes and their first quarter estimated taxes – fun!

Paying estimated taxes

There are two ways to pay estimated taxes. The easiest, fastest, and safest way to pay is online with the IRS Electronic Federal Tax Payment System (EFTPS). Sign up is free and only takes a few minutes. Here is a detailed tutorial for how to enroll for electronic tax payments for your individual or business taxes. Keep in mind that while it only takes a few minutes to sign up for the EFTPS, it takes about 15 days to receive your PIN, so don’t wait until the last minute to sign up! (you can create an account for your personal taxes and a separate account for your business taxes if you have an EIN).

You can also pay estimated taxes by mail with the IRS Form 1040-ES. Download the pdf to calculate your estimated taxes, then fill out one of the vouchers on the form to send along with your estimated tax payment.

For more information about estimated taxes, check out the estimated tax guide on our sister site, or visit these IRS resources:

• Publication 505, Tax Withholding and Estimated Tax
• Estimated Taxes
• Form 1040-ES

Though we’re months away from tax season, it’s a great time to start thinking about how to organize your financial records. What makes tax time so stressful for many people is the fact that they have to do a lot of record keeping in a short amount of time. Instead of procrastinating, get a head start now so you can relieve a ton of stress and make filing your tax return much easier and faster.

Why Should You Keep Financial Records?

How long should you keep financial records?

We typically need to keep fewer records than we do. However, if you understand why you need to keep certain records in the first place, that will help you determine what to keep and what to toss.

Here are 6 reasons why you need to keep records:

1. Identify your sources of income. If you receive income from a variety of sources, having complete records will help you separate business income from non-business income or taxable from non-taxable income.

2. Make an insurance claim. It’s a good idea to keep receipts for large purchases—like jewelry, appliances, electronics, and sporting goods—in the event you need to prove the original purchase price to an insurer or to make a warranty claim.

3. Get a loan. When you apply for a large loan to purchase a home or business, for instance, you must produce several years’ worth of income, banking records, and more.

4. Keep track of your property basis. You need to keep records that show the basis, or cost, of your home so you know if there is a gain or loss when you sell it. The adjusted basis includes the original purchase price plus the cost of any improvements you’ve made to the property. You also need this information to figure depreciation if you rent out part of your home or use it for business purposes. See Publication 530, Tax Information for Homeowners and Publication 551, Basis of Assets for complete details.

5. Keep track of investment gains and losses. You need to keep records that allow you to determine your basis in an investment (such as stocks, bonds, mutual funds, and exchange-traded funds), so you know if there is a gain or loss when you sell it. See Publication 550, Investment Income and Expenses for more information.

6. Support information you submit on your tax return. If you were ever audited by the IRS, you’d be very happy to have all the documents that back up the tax return in question. Taxpayers are responsible for what’s submitted on their tax return—even if it was prepared by an accountant. Being able to quickly produce back up documents for income, tax deductions, and tax credits, can help you avoid having to pay additional tax and penalties.

What Financial Records Should You Keep?

Now that you know the reasons why records are important, here’s a list of basic financial documents you should keep related to your income, expenses, home, and investments:

• Form W-2
• Form 1099
• Form K-1
• Bank statements
• Brokerage statements
• Receipts that document tax deductions or credits (such as charitable contributions, mortgage interest, real estate taxes, child care, and medical expenses—for a complete list refer to Publication 552, Recordkeeping for Individuals)
• Credit card statements that contain tax-related transactions
• Auto mileage logs
• Real estate closing statements
• Receipts that document substantial home improvements
• Insurance records
• Retirement account information

I recommend that you attach all tax-related paperwork to your tax return each year and file it away in a legal-size clasp envelope that’s clearly labeled with the tax year.

Having tax returns on hand can help you (or your accountant) prepare future returns. Additionally, in the event of your death tax return copies would greatly assist the administrator of your estate.

How Long Should You Keep Financial Records?

Since you can amend a tax return for up to 3 years or be audited for up to 6 years (in some cases), most people say that’s enough time to hang on to them. However, I recommend you keep old tax returns forever and here’s why: The IRS says, “You must keep your records as long as they may be needed for the administration of any provision of the Internal Revenue Code. “Any provision” of the IRC is pretty broad!

Additionally, the IRS recommends that you keep a copy of every W-2 you receive in your lifetime until you begin receiving Social Security retirement income. Those forms would be the only way to confirm your earnings in a particular year and reconcile an error in your benefits.

Instead of pulling out W-2 forms and keeping them in a separate file, it’s just easier to save your entire tax return. Yes, it takes up more space in your filing cabinet or attic, but for me keeping the full backup is worth it.

Use an Easy Recordkeeping System

I created a step-by-step video that shows you exactly how I organize my personal records. When you sign up at SmartMovesToGrowRich.com it’s one of several information gifts you receive. You’ll also get 2 free chapters from my award-winning book, Money Girl’s Smart Moves to Grow Rich, which is an easy-to-understand guide to personal finance.

Being stress-free at tax time—while everyone else is rushing around—is a great feeling! So take a little time to get organized now and set up a system that will keep you level-headed about taxes for decades to come.