How Long Should You Keep Tax Papers?

Tax papers include various documents related to income, deductions, credits, and filed tax returns. Maintaining these records is important to support information reported on a tax return in case of a review by tax authorities. They also serve as a personal financial history, detailing financial activities.

The Standard Retention Period

The most common guideline for retaining tax records is to keep them for three years. This period begins from the date you filed your original tax return or the due date of the return, whichever is later. This three-year timeframe aligns with the general statute of limitations for the Internal Revenue Service (IRS) to assess additional tax or for a taxpayer to claim a refund. During this period, the IRS can audit a return and request documentation to verify reported income, deductions, and credits.

Situations Requiring Longer Retention

While the three-year rule applies in many cases, specific circumstances necessitate retaining tax records for longer periods. If you omit more than 25% of your gross income from a tax return, the IRS has six years from the filing date to assess additional tax. This extended period allows the IRS more time to identify significant underreporting.

For taxpayers who claim a loss from worthless securities or a bad debt deduction, records should be kept for seven years. This longer retention period accounts for the specific nature of these deductions, which can involve complex determinations.

In situations where a fraudulent return is filed or no return is filed at all, there is no statute of limitations, meaning records should be kept indefinitely. This ensures tax authorities can pursue issues related to unfiled or fraudulent returns at any point in the future.

Records relating to property, such as a home or investments, that affect the basis of the property should also be retained indefinitely or until several years after the property is sold and the gain or loss is reported on a tax return. The original cost and any improvements affect the calculation of gain or loss when the property is eventually disposed of.

What Documents to Retain

Retaining specific types of documents supports the information reported on tax returns. For income, individuals should keep W-2 forms from employers, various 1099 forms (such as 1099-INT, 1099-DIV, and 1099-MISC), and K-1 forms from partnerships, S corporations, or trusts.

For deductions and credits, keep receipts for itemized deductions like medical expenses, charitable contributions, and business expenses. Mortgage interest statements (Form 1098), student loan interest statements, and records supporting child care or education credits are also important.

For investments, retain purchase and sale confirmations for stocks, bonds, and mutual funds, and records of reinvested dividends, as these affect cost basis and capital gain or loss calculations. Property records, including closing statements from real estate purchases or sales and receipts for home improvements, are necessary to establish the property’s basis. Bank statements, cancelled checks, and copies of prior year’s tax returns and supporting schedules serve as comprehensive financial records.

Safely Disposing of Records

Once the appropriate retention period for tax records has passed, securely disposing of these documents is important to protect personal and financial information. Physical tax documents, such as old returns, W-2s, and receipts, should be shredded using a cross-cut shredder. This method renders the information unreadable and prevents identity theft or other misuse of sensitive data. Professional shredding services can also be used for larger volumes of documents.

For digital tax records, secure deletion methods are necessary to ensure the data cannot be recovered. This might involve using specialized software to wipe drives or securely delete files, rather than simply moving them to the recycle bin.

Before disposal, it is important to confirm that the retention period for the specific record has expired and that there are no other reasons, such as non-tax purposes, requiring continued retention.