How Many Years of Tax Records Should You Keep?

Managing tax records effectively ensures compliance and prevents issues with tax authorities. Knowing how long to keep various documents is important for individuals. Proper record-keeping provides peace of mind and is valuable if questions arise about past tax filings.

General Retention Period

The Internal Revenue Service (IRS) generally recommends keeping tax returns and supporting documentation for at least three years. This period typically begins from the date you filed your original return or the due date, whichever is later. This timeframe aligns with the IRS’s standard statute of limitations for assessing additional tax. If you file an amended return to claim a refund, you generally have three years from the original filing date or two years from the payment date, whichever is later.

Situations Requiring Longer Retention

Some situations necessitate keeping tax records for periods longer than the standard three years. If you omit more than 25% of your gross income from your tax return, the IRS has an extended six-year statute of limitations to assess additional tax. For individuals claiming a loss from worthless securities or a bad debt deduction, records should be retained for seven years.

Records related to property, such as a home or investments, should be kept indefinitely or until the statute of limitations expires for the tax year in which you sell or dispose of them. These documents, including purchase and sale confirmations, receipts for home improvements, and closing statements, are essential for determining the cost basis of the asset. The cost basis is used to calculate any taxable gain or loss when the property is eventually sold.

Records for non-taxable income sources should be kept indefinitely to prove their non-taxable nature if questioned. State tax record retention requirements can differ from federal guidelines; adhere to the longer period if there is a discrepancy. If a fraudulent return is filed or no return is filed at all, there is no statute of limitations, meaning records should be kept indefinitely.

Types of Records to Retain

Keep documents that support the information reported on your tax return. Income records include W-2 forms from employers, 1099 forms for interest, dividends, and self-employment earnings, and K-1 forms from partnerships or S corporations. Bank statements showing income deposits also serve as valuable proof.

Records supporting deductions and credits are essential. This includes receipts for itemized deductions like medical expenses, charitable contributions, and state and local taxes paid. For business expenses, detailed receipts, invoices, and mileage logs are necessary.

Investment records are important to track the cost basis of your assets. This category includes purchase and sale confirmations for stocks, bonds, and mutual funds, as well as annual statements from brokerage accounts. Property records, such as closing statements for home purchases or sales, and receipts for significant home improvements, are vital for calculating capital gains or losses.

Records related to retirement contributions and distributions, like IRA contribution statements or 1099-R forms, should be kept. Retain copies of your prior year tax returns, as they are useful for preparing future returns or amending past ones.

Record Storage and Disposal

Secure storage of tax records is important to protect sensitive personal financial information. Physical documents can be stored in a secure filing cabinet or a fireproof safe, guarding against loss or damage. For digital records, options include external hard drives, secure cloud storage services, or encrypted folders on your computer. When using digital storage, regularly backing up your files to multiple locations is a sound practice to prevent data loss.

Regardless of the storage method, maintaining an organized system, such as labeling folders by tax year, makes it easier to locate documents if needed. Once the retention period for specific records has passed, safe disposal is necessary to prevent identity theft. Physical documents containing sensitive information, like old tax returns, W-2s, and bank statements, should be shredded. Home shredders can be used, but professional shredding services offer a higher level of security by using industrial-grade equipment. For digital files, secure deletion methods should be employed to ensure the data cannot be recovered.