Have you ever wondered, “How long should you keep your tax records?” If you’re like most taxpayers, you have a mountain of pay stubs, canceled checks, receipts, tax forms, and other documentation taking up precious space in your home. Your first instinct may be to place these items in a box and shove them into the back of a dark closet. Not all tax records, however, need to be kept in perpetuity. Shredding the pile is also an option, but may cause you some headaches down the line if you destroy something of importance. To help you avoid future problems, we’ve put together an easy timeline of when those old tax records can be tossed.
Tax Record Guidelines
Knowing which tax records to save and how long to keep them will not only free your home from clutter, but also provide peace of mind. Follow these general guidelines when retaining your tax records.
Keep These Tax Records for One Year
You should hold on to your pay stubs until the end of the year. Once you receive your W-2 in January, you can cross-reference it to ensure nothing is missing. If it matches up, feel free to shred your pay stubs from the previous year. The same holds true for independent contractor work. Once you receive your 1099s, you can dispose of any weekly/monthly payment receipts.
Tax Records That Use The Three-Year Rule
The IRS recommends keeping all tax returns and related documentation for three years after the tax filing deadline. This is because there is a three-year statute of limitations for them to review your return, in most cases. If you are claiming income, deductions, or credits on your return, be sure to keep the following tax records on hand:
- W-2 forms
- 1099s (such as 1099-DIV, 1099-INT, or 1099-MISC)
- Form-1098, Mortgage Interest Statement (and other 1098 forms)
- Charitable giving records (receipts or canceled checks)
- Health insurance forms (Form 1095-A, B, or C) or statement from your insurance provider
- Sales slips, invoices, and receipts
If you sell stocks, bonds, or other taxable investments, you’ll want to keep these records for up to three years after the sale. Although brokers must report the cost basis for stocks purchased after 2011 and mutual funds bought after 2012, it’s still a good idea to maintain your own tax records in case you switch brokers.
You’ll also want to keep records of ROTH IRA contributions for three years after the account is closed This is to prove that you already paid taxes on the contributions and should not be taxed again when the money is withdrawn.
Keep in mind that there are certain instances where the IRS statute of limitations exceeds three years. For example, if you fail to report more than 25 percent of your gross income, the IRS has six years to assess any additional tax. The three-year rule generally applies to those who report all their income and do not commit fraud. There is no statute of limitations if you file a fraudulent return.
Keep These Tax Records for Four Years
If you maintain employment tax records, you should keep these at least four years after the tax is due or paid, whichever is later.
Self-Employment & The Six-Year Rule
Are you self-employed? You may want to retain your 1099s for at least six years just in case you forgot to include some of your income on a previous tax return. If you have income from foreign financial assets, you should also keep any records related to it for six years. After that period of time, the IRS cannot assess any additional taxes.
Seven Years of Bad Luck
Did you loan money to a relative or make a bad stock pick? If so, you’ll want to retain records of these transactions for at least seven years. That’s how long you’ll have to claim a bad debt deduction or loss from worthless securities on your tax return.
Keep These Tax Records for Ten Years
Have you paid taxes to a foreign government? If so, you could be entitled to a credit or deduction on your U.S. federal tax return. You’ll have 10 years to amend your return if you need to correct the amount of credit you claimed, or to switch from taking a deduction to a tax credit. Just be sure to keep all documents related to the foreign taxes paid for at least 10 years.
How Long Should I Keep Property Records?
You should keep any records relating to property until the period of limitations expires for the year in which you dispose of the property. These are needed to help figure depreciation, amortization, or depletion deduction. You’ll also need the documents to help figure any gain or loss.
If you swapped one property for another in a nontaxable exchange, you must keep the records for your old property, as well as the new one, until the period of limitations expires for the year in which you get rid of (or sell) the new property.
What Happens If I Don’t Keep My Tax Records?
In the event the IRS audits your tax return, certain credits and tax deductions could be denied if you don’t have the tax records available to back up your claims. This could lead to a reduction in your refund, or worse, a tax bill. It may be possible, however, to reconstruct some or all of your lost documentation.
How to Protect & Store Your Tax Records
Even if you use a professional tax service, do not rely on them to maintain your tax records. Ultimately, you are responsible for your tax returns and related documents. If you plan to store your records digitally, be sure to use an online storage service that encrypts your data. Once you have a digital backup, you should shred the paper copy unless it’s an original deed, title, or investment paperwork. All paper copies should be stored in a waterproof and fireproof safe, or in a bank safe deposit box.
If you keep digital copies on your home computer, be sure to wipe all electronic records before selling the computer or disposing of it. This will ensure your personal data, such as your Social Security number, is safe from criminals who may try to steal your identity.