How Long Should I Keep Tax Records?

How Long Should I Keep Tax Records?

If you’re like many Americans, you may have tax returns from a decade ago languishing in your filing cabinet. But you don’t need to hold on to tax documents for as long as you might think. In almost all cases, you can shred or throw away any documents such as W-2s, 1099s, or other forms or receipts three years after you file your tax return.

The basic retention period:

Federal tax return substantiation is generally three years from the later of the tax return filing due date OR the actual filing date. Your state and local audit timelines may differ. Often states can review tax returns after your federal return is officially closed to a potential audit.

Period of Limitations that apply to income tax returns

  1. Keep pay stubs for 1 year at least until you check them against your W-2s. If all the totals match, you can then shred the pay stubs. Take a similar approach with monthly brokerage statements—you can generally dispose of them if they match up with your year-end statements and 1099s.
  2. Keep records for 3 years from the date you filed your original return or 2 years from the date you paid the tax, whichever is later if you file a claim for credit or refund after you file your return. Examples include:
    • W-2 forms reporting income
    • 1099 forms showing income, capital gains, dividends, and interest on investments
    • 1098 forms if you deducted mortgage interest
    • Canceled checks and receipts for charitable contributions
    • Records showing eligible expenses for withdrawals from health savings accounts and 529 college-savings plans; and
    • Records showing contributions to a tax-deductible retirement savings plan, such as a traditional IRA
  3. Keep employment tax records for at least 4 years after the date that the tax becomes due or is paid, whichever is later.
  4. Keep records for 6 years if you do not report income that you should report, and it is more than 25% of the gross income shown on your return.
  5. Keep records for 7 years if you file a claim for a loss from worthless securities or bad debt deduction.
  6. Keep records indefinitely if you do not file a return.
  7. Keep records indefinitely if you file a fraudulent return.

Note: Keep copies of your filed tax returns. They help in preparing future tax returns and making computations if you file an amended return.

The following questions should be applied to each record as you decide whether to keep a document or throw it away.

Are the records connected to property?

Generally, keep records relating to property until the period of limitations expires for the year in which you dispose of the property. You must keep these records to figure any depreciation, amortization, or depletion deduction and to figure the gain or loss when you sell or otherwise dispose of the property.

If you received property in a nontaxable exchange, your basis in that property is the same as the basis of the property you gave up, increased by any money you paid. You must keep the records on the old property, as well as on the new property until the period of limitations expires for the year in which you dispose of the new property.

Non-tax-related needs?

When your records are no longer needed for tax purposes, do not discard them until you check to see if you have to keep them longer for other purposes. For example, your insurance company or creditors may require you to keep them longer than the IRS does. Copies of divorce decrees, records of insurance, and home sale closing paperwork are common examples of documents needed for other reasons.

Keep some things forever.

Some items should be kept indefinitely. These include, but are not limited to, copies of your 1040 tax return, major asset purchases and sales (i.e. home mortgage, home closing documents, documentation for stock and investment transactions, major asset purchase and sale documents, insurance documentation, and birth/death/marriage certificates).

 

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