How Many Years of Taxes Are You Supposed to Keep?

Tax records are important for verifying information on tax returns and responding to inquiries from tax authorities. Keeping accurate records provides evidence for claims, helps with amending returns, and ensures compliance with tax regulations.

Standard Record Retention Period

For most taxpayers, the standard record retention period is three years. This three-year window typically begins from the date you filed your original tax return or the due date of the return, whichever occurred later. This period aligns with the general statute of limitations, the timeframe during which tax authorities can assess additional tax or you can claim a refund. For example, if you filed your return early, the three-year period still starts from the April 15th due date.

Situations Requiring Extended Retention

While a three-year retention period covers most situations, certain circumstances necessitate keeping tax records for longer. A six-year retention period applies if you substantially understate your gross income by omitting more than 25% of the total gross income reported on your return. This extended period allows tax authorities more time to identify and assess taxes on significant unreported income. For instance, if you reported $100,000 in gross income but failed to include an additional $30,000, the six-year rule would apply because the omission exceeds 25% of the reported income.

Records related to property, such as a home purchase or stock transactions, should be retained for as long as you own the property, plus at least three years after you sell or dispose of it. These documents are necessary for determining the cost basis of the asset, which is used to calculate any gain or loss when the property is eventually sold. For instance, home improvement receipts can increase your adjusted basis, potentially reducing capital gains tax upon sale.

In cases of fraudulent returns or if you completely fail to file a tax return, there is no statute of limitations, meaning records should be kept indefinitely. Tax authorities can pursue collection of taxes indefinitely if a return was never filed. Similarly, if a return is found to be false or fraudulent, the entire return may be open to assessment without a time limit.

Key Documents to Retain

You should keep all income statements, including:

• W-2 forms from employers
• Various 1099 forms (interest, dividends, miscellaneous income, brokerage transactions)
• K-1 forms (income from partnerships, S corporations, or trusts)

Receipts and other documentation for deductions, such as charitable contributions, medical expenses, or business-related costs, are important to substantiate claims. Bank and brokerage statements provide a comprehensive record of financial activities. Records of asset purchases and sales, including closing documents for real estate, are crucial for determining cost basis and calculating gain or loss. Always keep copies of your filed tax returns, along with any supporting schedules, as they are a foundational record and assist in preparing future returns.

Secure Storage of Records

For physical documents, consider using a fireproof safe, a waterproof container, or a secure filing cabinet. Organizing these files by tax year can make them easily retrievable. Keeping physical records in a secure location helps protect them from loss, theft, or natural disasters.

Digital storage offers another secure option for tax records. You can scan physical documents to create electronic copies and store them on external hard drives, USB drives, or secure cloud storage services. Encrypt sensitive digital files to enhance security and prevent unauthorized access. Implement a regular backup routine for digital files, with copies stored in a separate location, to ensure redundancy and protect against data loss.