How Long Should You Keep Your Tax Records?

Maintaining accurate and accessible tax records is a fundamental aspect for individuals. These records support information reported on tax returns and help in responding to inquiries from tax authorities. Proper record-keeping ensures taxpayers can substantiate income, deductions, and credits, avoiding potential penalties and facilitating smoother interactions with tax agencies.

General Record Retention Periods

The Internal Revenue Service (IRS) provides guidelines for record retention based on the statute of limitations for assessing additional tax. For most tax returns, the IRS has three years from the filing date or the return’s due date, whichever is later, to audit and assess additional tax. Therefore, keep records for at least three years from your filing date.

An extended retention period applies if there is a substantial omission of income. If you omit more than 25% of your gross income from your tax return, the IRS has six years to assess additional tax. This six-year period begins from the date the return was filed or its due date, whichever is later.

For fraudulent returns or if you do not file a return, there is no statute of limitations. The IRS can assess tax or initiate collection actions at any time. In these cases, keep records indefinitely to protect against future inquiries. If you claim a deduction for a bad debt or a loss from worthless securities, keep supporting records for seven years to substantiate the deduction if questioned.

Special Circumstances for Record Keeping

Certain financial activities and assets require longer record retention periods. Records for property, such as a home or investments, are important. Keep all documents related to the purchase, improvement, and sale of property for as long as you own it. After selling the property and reporting the transaction, retain these records for at least three years following that tax return’s filing. These documents help determine the property’s cost basis and calculate any taxable gain or deductible loss when sold.

Employers, including those with household help, must retain employment tax records. These records, detailing wages paid and employee identification numbers, should be kept for at least four years after the tax becomes due or is paid, whichever is later.

For retirement accounts, especially those with non-deductible contributions, retain specific records. If you made non-deductible contributions to an Individual Retirement Arrangement (IRA), keep copies of Form 8606, “Nondeductible IRAs,” indefinitely. This form tracks your IRA basis, preventing non-deductible contributions from being taxed again upon withdrawal. These records help prove a portion of your distributions is not taxable.

Documents Supporting Your Tax Return

To support information on your tax return, retain various documents. Income records include W-2 forms from employers and 1099 forms reporting interest, dividends, independent contractor income, and Social Security benefits. These documents verify reported earnings.

Records of expenses are important, especially for claiming deductions. This category includes receipts for deductible expenses, canceled checks, and credit card statements that substantiate expenditures. For business use of a car, detailed mileage logs support transportation deductions.

Documentation for claimed deductions and credits is important. This includes records for medical expenses, charitable contributions, education expenses, and child care costs. Such records demonstrate eligibility for claimed tax benefits. Taxpayers should also keep records of estimated tax payments made throughout the year, along with copies of their filed tax returns and all accompanying schedules.

Organizing and Storing Your Records

Proper organization and secure storage of tax records are as important as knowing retention periods. Physical records can be kept in file cabinets or secure boxes, ideally fireproof and waterproof, to protect against damage. Labeling folders by tax year and categorizing documents by type, such as income or expenses, makes retrieval easier.

Digital storage offers a convenient alternative, allowing taxpayers to scan paper documents and store them electronically. Cloud storage services or external hard drives can be used for digital files, but ensure they are password-protected and regularly backed up. Maintaining both physical and digital copies provides an added layer of security.

Implementing a consistent system for organizing records throughout the year, rather than waiting until tax season, streamlines the process. Regularly reviewing and updating the organization system helps maintain its effectiveness. When documents are no longer needed for tax purposes, shredding them is recommended to protect personal information.