One of the most often questions I get from clients is how long to keep their tax returns and records. Most people think the proper answer is seven years. But, it is a little more complicated than that. That is because those forms, receipts, canceled checks, and other documents could be needed later. The IRS generally has three years after the due date of your return (or the date you file it, if later) to initiate an audit — that hasn't changed.
In addition, some documents may be kept even longer. For instance, it might be wise to save W-2 forms until you start receiving Social Security benefits so you can verify your income if there's a problem - unless you go to the ssa.gov site and verify that they have the correct information recorded for you.
Here is some general information on how long you should keep various types of information:
Tax records you should keep for one year:
- Keep pay stubs at least until you check them against your W-2s (if all the totals match, you can then shred the pay stubs).
- Also do this with monthly brokerage statements.
- You can dispose of these statements if they match up with your year-end statements and 1099s. This is because the IRS also has copies of these 1099s.
What you should you keep for three years?
You should save documents that support any income and tax deductions and credits claimed on your tax return for at least three years after the tax filing deadline. This includes:
- W-2 forms.
- 1099 forms that show income, capital gains, dividends, and interest on investments.
- 1098 forms if you claimed the mortgage interest deduction.
- Canceled checks and receipts for charitable contributions (if you itemize deductions).
- Records showing eligible expenses for withdrawals from health savings accounts and 529 college savings plans (to prove they are non-taxable).
- Records showing contributions to a tax-deductible retirement-savings plan, such as a traditional IRA (proving an adjustment to income).
If you don't itemize deductions on Schedule A, you probably don't need to save as many documents. For example, if you are not deducting charitable contributions, then you don't need to keep donation receipts or canceled checks for tax purposes.
Your Investments
You will need to save some records for at least three years after you sell.
Such as, you should keep records of contributions to a Roth IRA for three years after the account is emptied. You will need these records to show that you already paid taxes on the contributions and shouldn't be taxed on them again when the money is withdrawn.
In addition:
- Keep investing records showing purchases in a taxable account (such as transaction records for stock, bond, mutual fund, and other investment purchases) for up to three years after you sell the investments.
- Report the purchase date and price when you file your taxes for the year they're sold to establish your cost basis (original price you paid, plus other costs to acquire the security), so you can figure your taxable gains or losses when you sell the investment.
Although your broker is generally required to report the cost basis, it is a good idea to keep copies of these records yourself. (If you inherit stocks or funds, keep records of the value on the day the original owner died to help calculate the basis when you sell the investment.)
Property Tax Records
If you inherit property or receive it as a gift, make sure you keep documents and records for at least three years after you dispose of the property. There are special rules for inherited property.
Income from selling property is considered taxable if sold for more than your basis in the property, which is determined by:
- The basis of the inherited property is generally the property's fair market value on the date of the descendant's death.
- For gifted property, the basis is generally the same as the donor's (usually the fair market value when you received the gift).
You should keep home sale and improvement receipts and documents for three years after you've sold the home. Most people don't have to pay capital gains tax on home sale profits if they have lived there as their primary home for two of the last three years, because:
- Single filers with $250,000 or less in gains don't need to pay capital gains tax.
- Joint filers with $500,000 or less in gains don't need to pay capital gains tax.
But if you sell the house before the two years or if your gains are larger, you will need to have your home purchase records. Save receipts for home improvements, too. They can increase your adjusted basis (cost of acquiring the home, plus cost of improvements, less casualty losses), which can help reduce your tax liability. Similar rules may apply to any rental property you own.
So, save records for at least three years after selling the property.
When you should keep your taxes for six years
The IRS has up to six years to initiate an audit if you've neglected to report at least 25% of your income.
For self-employed people, who may receive multiple 1099s, it isn't difficult to overlook reporting some income (if you don't have a good bookkeeping system). So, to be on the safe side, you should generally keep your 1099s, receipts, and other records of business expenses for at least six years.
Also, if you don't report $5,000 or more of income attributable to foreign financial assets:
- The IRS has six years from the date you filed the return to assess tax on that income.
- So save any tax records related to such income until the six-year window is closed.
Keeping tax records for seven years
Sometimes your stock picks don't turn out so well. Or maybe you loan money to someone who doesn't pay you back. If that's the case, you might be able to write off your worthless securities or bad debts.
In this case, make sure you keep related records and documents for at least seven years - the time you have to claim a bad debt deduction or a loss from worthless securities.
(Note: Loaning money is considered a gift if you knew the person may not pay you back. Gifts are not tax-deductible, so you can't write these off as bad debts.)
Keeping tax records for ten years
This one is rare, but If you paid taxes to a foreign government, you may be entitled to a credit or deduction on your U.S. tax return called the Foreign Tax Credit.
You’ll typically have up to 10 years to claim this credit, so you should save any tax records or documents related to foreign taxes paid for at least 10 years.
Tax records to keep forever
Some tax (and even non-tax) documents you should keep indefinitely, such as:
- Birth certificates, marriage licenses, or divorce papers.
- Social Security cards.
Keeping these records in a fire and water-safe box can help you recover your tax documents should a natural disaster occur and you are audited by the IRS. Also, you may want to consider digitizing your tax records as a backup so you may access your important papers anytime. I actually have pdf copies of all my records for over two decades. I will probably never need them, but it give me some piece of mind.