From the Tax Hotline
By: Tax Hotline
Spring 2025 (Vol. 43, No. 1)
If you’ve filed your 2024 tax return, you may be eager to do some spring cleaning, starting with tax-related paper and digital clutter. The documentation needed to support a tax return may include receipts, bank and investment account statements, K-1s, W-2s, and 1099s. Three years is the general rule. But don’t be hasty: Failure to keep a paper trail for the information reported on a tax return could lead to problems if the IRS audits it.
Generally, the IRS’s statute of limitations for auditing a tax return is three years from the return’s due date or the filing date, whichever is later. However, some tax issues are still subject to scrutiny after three years. If the IRS suspects that income has been understated by 25% or more, the statute of limitations for audit rises to six years. If no return was filed or fraud is suspected, there’s no limit on when the IRS can launch an inquiry.
It’s a good idea to keep copies of your tax returns indefinitely as proof of filing. Supporting records, such as canceled checks, charitable contribution receipts, mortgage interest payments, and retirement plan contributions, generally should be kept until the three-year statute of limitations expires. These documents may also be helpful if you need to amend a return.
Based on the three-year rule, in 2025, you’ll generally be able to discard most records associated with your 2021 return if you filed it by the April 2022 due date. Extended 2021 returns could still be vulnerable to audit until October 2025. But if you want extra protection, keep supporting records for six years. You need to hang on to some tax related records beyond the statute of limitations. For example:
Retain W-2 forms until you begin receiving Social Security benefits. That may seem long, but if questions arise regarding your work record or earnings for a particular year, you’ll need your W-2 forms to help provide the required documentation.
Keep records related to real estate or investments for as long as you own the assets, plus at least three years after you sell them and report the sales on your tax return (or six years if you want extra protection).
Hang on to records associated with retirement accounts until you’ve depleted the accounts and reported the last withdrawal on your tax return, plus three (or six) years.
Retain records that support figures affecting multiple years, such as carryovers of charitable deductions or casualty losses, until they have no effect, plus seven years.
Keep records that support deductions for bad debts or worthless securities that could result in refunds for seven years because you have up to seven years to claim them.
Keep in mind that these are the federal tax record retention guidelines. Your state and local tax record requirements may differ. In addition, lenders, co-op boards and other private parties may require you to produce copies of your tax returns as a condition of lending money, approving a purchase or otherwise doing business with you.
Q: I just won twenty thousand dollars at a casino in Vegas. What are the tax consequences?
A: Whether you’re a casual or professional gambler, your winnings are taxable. However, the Treasury Inspector General for Tax Administration reports that gambling income is vastly underreported. Failing to report winnings accurately can lead to back taxes, interest and penalties. Here’s what you need to know to stay compliant and potentially minimize your tax liability.
Federal law requires reporting all gambling winnings, cash or prizes (such as from casinos, lotteries, raffles, horse racing and online betting) at fair market value. Certain winnings are subject to federal tax withholding, reducing your risk of interest and penalties.
If winnings exceed certain thresholds (for example, $1,200 for slots, $5,000 for poker), the gambling establishment must issue Form W-2G to you and the IRS. Even if you don’t receive a Form W-2G, you’re still required to report gambling income.
If you’re an amateur, you’ll report your gambling income on Form 1040, Schedule 1. You can claim gambling losses as itemized deductions, but only up to the amount of your gambling winnings.
If you gamble as a profession, the tax rules are a little different because your gambling activities are treated as a business. To qualify as a professional gambler, you must demonstrate that gambling is your primary source of income and that you engage in it with continuity and regularity.
Tax compliance isn’t tricky, but it’s important. Here are some tips:
- Log your gambling activities. Include details such as dates and locations of when and where you gambled, types of wagers, and amounts won and lost. Remember that a log kept contemporaneously generally holds more weight with the IRS than one constructed later.
- Maintain a file of gambling-related receipts, statements and other documentation. Thorough documentation is critical, especially if you’ll be deducting gambling losses or if you’re a gambling professional and will be claiming gambling-related business expenses.
- Adjust tax withholding or estimated tax payments if needed. Remember that income taxes must be paid annually via withholding or estimated payments. If the tax you owe on the April 15 filing deadline exceeds what you paid during the tax year through withholding and estimated payments, you might be subject to interest and penalties.
Q: Can I rent my home to my business and get a business tax deduction?
A: Yes, you can rent your home to your business for meetings, retreats, or corporate events. If you follow the requirements, you are not taxed on the income and your business gets to deduct the expense. The Augusta Rule as per IRS code section 280a(g) was originally created for homeowners in Augusta, Georgia, who rented out their homes during the Masters golf tournament but now this rule applies to any U.S. homeowner. Here are the basics:
- Available to entities only such as an LLC or S Corp – not sole proprietors.
- You cannot exceed 14 days rental. If you rent for more than 14 days, all income becomes taxable.
- Must be your primary or second home (no rental or investment properties)
- You must charge fair rental value.
- Keep careful records including the rental contract, comparable rental rates for the lease period and bank records to show proof the business made the rental payment.
Q: I just got scammed for $5,000 with no repayment. Can I deduct this on my next tax return?
A: For tax year 2025, you can deduct a theft when the loss is:
- Incurred in your trade or business
- Incurred in a transaction you entered in for profit
- Is a personal casualty loss
Typical scams that qualify include most losses you incur from scams where your intent was to make money or protect your funds such as phishing schemes, compromised account scams or too good to be true investment ploys. Personal losses such as getting scammed by a potential romance partner or paying to save a supposedly kidnapped or distressed relative don’t qualify in 2025.