How Long Should You Keep Tax Records?

Maintaining accurate tax records is fundamental for responsible financial management. These records help prepare accurate tax returns, ensure tax law compliance, and provide documentation for reviews. Proper record-keeping helps you claim eligible deductions and credits, potentially reducing your tax liability. It also provides a clear financial history, beneficial for non-tax purposes like loan applications or financial planning.

Standard Retention Periods

The length of time you should retain tax records is determined by the “period of limitations.” This is the timeframe during which you can amend your tax return to claim a refund or credit, or when the IRS can assess additional tax. For most individual income tax returns, this period is three years from the date you filed your original return or the due date, whichever is later.

There are specific circumstances that extend this standard three-year window. If you omit more than 25% of your gross income from your tax return, the period of limitations increases to six years. This extended period also applies if you fail to report more than $5,000 of foreign income. If you file a claim for a loss from worthless securities or a bad debt deduction, you should keep records for seven years.

If a fraudulent return is filed or no return is filed, there is no statute of limitations. This means the IRS can assess tax at any time, requiring records to be kept indefinitely. Most IRS audits involve returns filed within the last two years, but the agency can extend its review if substantial errors are found.

Retention for Specific Record Categories

Specific types of records have recommended retention periods that align with or extend beyond the general rules, reflecting their importance in substantiating financial transactions.

Income Records

Documents detailing your income, such as W-2 forms, 1099 forms (e.g., interest, dividends, independent contractor payments), and K-1 forms, should be kept for at least three years after filing your tax return. Bank statements showing deposits and revenue also serve as proof of income and should be retained for this period.

Expense Records

Records supporting deductions and credits are important for proving claimed expenses. Receipts for medical expenses, charitable contributions, and business-related costs, along with canceled checks and credit card statements, should be kept for at least three years from the tax filing date.

Asset Records

Records related to the purchase, sale, or improvement of property, including real estate, investments, and business assets, should be retained until the period of limitations expires for the year you dispose of the property. These documents, such as deeds, closing statements, purchase confirmations, and receipts for major improvements, are necessary to calculate the asset’s basis, which impacts any gain or loss when sold, and to figure out depreciation. For instance, real estate records should be kept for at least six years after the property’s sale.

Retirement Account Records

For retirement accounts, keep records of contributions and distributions. While some recommend seven years, it is prudent to keep records like Form 8606 (for non-deductible IRA contributions) indefinitely. This ensures documentation of your basis in traditional IRAs, affecting taxability of withdrawals. For Roth IRAs, records of contributions and conversions are important, especially if withdrawals occur before age 59½.

Employment Tax Records

If you are self-employed or an employer, employment tax records must be retained for at least four years after the tax becomes due or is paid, whichever is later. These records include employer identification numbers, wage and payment dates, employee names, addresses, Social Security numbers, and copies of Forms W-4. Documentation for fringe benefits, tax deposits, and filed returns are also part of these records.

Maintaining Your Records

Effective organization of your tax records simplifies tax preparation and facilitates quick retrieval if needed for an audit. You can choose to maintain records in physical or digital formats, or a combination of both. Regardless of the method, the goal is to ensure security and accessibility.

For physical records, use folders or binders labeled by tax year and category. Subcategories for income, expenses, and asset documentation enhance organization. Store these documents in a secure, fireproof location, such as a locked cabinet or safe, to protect them from damage or theft.

Digital record-keeping offers convenience and reduces clutter. Scan physical documents to create legible digital copies. Organize these digital files into a logical folder structure on your computer or cloud storage, with folders for each tax year and subfolders for different document types. Regular backups to an external hard drive or secure cloud service prevent data loss. Digital files should be password-protected and encrypted for security.

Safely Disposing of Records

Once the retention period for your tax records has passed, secure disposal protects your personal and financial information. Discarding documents in the trash can expose you to identity theft.

For physical documents, shredding is the recommended method. Cross-cut shredders, which cut documents into small pieces, offer more security than strip shredders. Professional shredding services are also available and provide a secure way to destroy large volumes of sensitive documents, often offering a certificate of destruction. For digital files, secure deletion methods ensure data cannot be recovered. This might involve specialized software to overwrite data or physically destroying storage devices.