How Long Should You Keep Tax Returns?

Maintaining accurate tax records is a fundamental responsibility for taxpayers, serving as the primary defense against potential inquiries or audits from tax authorities. Proper record-keeping allows individuals to verify reported income, substantiate claimed deductions, and validate credits, ensuring compliance with tax regulations. Retaining these documents for the appropriate duration helps avoid future complications.

General Retention Periods

Most taxpayers should keep their tax returns and supporting documentation for three years. This period begins from the date the original return was filed or the due date, whichever is later. For instance, a 2023 tax return filed on April 15, 2024, requires records until April 15, 2027. This timeframe aligns with the audit window for assessing additional tax.

A seven-year retention period applies to records for claims of loss from worthless securities or bad debt deductions. For instance, if an investment becomes worthless, the seven-year period provides time for the taxpayer to claim the loss and for the tax authority to review it. Taxpayers should retain documentation for potential review.

Specific Circumstances for Extended Retention

Certain situations necessitate keeping tax records longer than the standard three or seven years. If a taxpayer substantially understates gross income by over 25% of the amount reported, the tax authority has six years from the filing date to assess additional tax. Taxpayers should be diligent in record retention if their income calculations are complex or involve multiple sources.

There is no statute of limitations for fraudulent tax returns or failure to file. Tax records should be kept indefinitely in these cases, as the tax authority can initiate proceedings at any time. Employers, including household employers, must retain employment tax records for at least four years after the tax becomes due or is paid, whichever is later.

Records for property, such as purchase, improvements, and sale of a home or investment property, should be kept until the statute of limitations expires for the tax year the property was disposed of. For instance, if a property was sold in 2023, records should be retained for at least three years from the date the 2023 return was filed or due. This ensures proper calculation of capital gains or losses.

Supporting Documents to Retain

Beyond the tax return, various supporting documents are important to retain. Income statements such as W-2 forms from employers and 1099 forms for interest, dividends, retirement distributions, and independent contractor payments verify reported income and ensure accuracy. Keeping these statements streamlines tax preparation and provides immediate proof of income.

Records substantiating deductions and credits include receipts for charitable contributions, medical expenses, and business expenses for self-employed individuals. Documentation for education expenses, such as Form 1098-T, and child care costs, like Form W-10, allow taxpayers to prove their eligibility for claimed tax benefits.

Records detailing the purchase and sale of assets, like stocks, bonds, or real estate, are needed for calculating capital gains or losses. Bank statements and canceled checks can serve as additional proof for income or deductions if primary records are unavailable. Copies of prior year tax returns are also useful, especially if there are carryovers of losses, deductions, or credits that affect current or future tax years.

Secure Disposal of Tax Records

Once the retention period for tax records has passed, secure disposal protects personal and financial information. Paper documents containing sensitive data, such as Social Security numbers, bank account details, or income figures, should be shredded. A cross-cut shredder renders documents unreadable by cutting them into small pieces, offering more security than strip-cut shredders. This prevents identity theft and financial fraud.

For electronic tax records on computers, external hard drives, or other digital media, simple deletion is insufficient. Secure deletion methods, such as specialized data-wiping software, ensure the data is irrecoverable. If a storage device is no longer needed, physical destruction can be a secure option. This might involve dismantling and destroying hard drive platters or using a degausser.

Many communities and financial institutions offer free or low-cost shredding events. These events provide a convenient and secure way to dispose of large quantities of sensitive paper documents. Utilizing such services prevents personal tax information from falling into the wrong hands after its retention period has expired.