How Many Years of Taxes Should I Save?

Keeping accurate tax records is a fundamental part of managing personal finances. Proper record-keeping helps ensure compliance with tax regulations and provides documentation if questions arise about a tax return. Retaining these documents allows individuals to support the income, deductions, credits, and other information reported to tax authorities, especially in the event of an audit. Understanding appropriate retention periods for financial documents is a practical step for any taxpayer.

Understanding General Retention Periods

Tax authorities recommend keeping tax records for a minimum of three years from the date you filed your original return or the due date, whichever is later. This three-year timeframe aligns with the typical statute of limitations for the Internal Revenue Service (IRS) to audit a return and assess additional taxes.

Specific circumstances extend this general retention period. If gross income is understated by more than 25% on a return, the IRS has up to six years to initiate an audit. For records related to a claim for a loss from worthless securities or a bad debt deduction, a seven-year retention period is advised. If a fraudulent return is filed or a tax return is not filed, records should be kept indefinitely as there is no statute of limitations. Employment tax records, such as those for household employees, should be retained for at least four years after the tax becomes due or is paid, whichever is later.

Identifying Key Documents to Keep

Retaining specific documents is important for substantiating information reported on a tax return. Income records include W-2 forms from employers, 1099 forms (such as 1099-INT, 1099-DIV, 1099-NEC, and 1099-K), and K-1 schedules from partnerships or S corporations. Bank statements also serve as proof of income and can verify reported amounts.

For deductions and credits, detailed records are necessary to support claimed expenses. This includes receipts, invoices, canceled checks, and other proofs of payment for items like medical expenses, charitable contributions, educational expenses (supported by Form 1098-T and Form 1098-E), and business expenses. These documents verify the amount, date, place, and business purpose of an expense, which is important if audited. Keeping copies of your filed tax returns is also important, as they summarize your tax history.

Asset records are important for calculating capital gains or losses. Purchase and sale documents for assets like real estate, stocks, and other investments determine the original cost, or “basis,” and the eventual gain or loss upon sale. Brokerage statements and trade confirmations provide the cost basis for securities. These records help ensure accurate reporting of transactions on forms like Form 8949 and Schedule D.

Records for Long-Term Financial Planning

Beyond immediate audit periods, certain records require long-term retention due to their impact on future financial events. Records establishing the cost basis of assets, such as a home, stocks, mutual funds, or inherited property, should be kept for as long as the asset is owned, plus the relevant tax retention period after its sale. This documentation helps accurately calculate capital gains or losses when the asset is sold, minimizing potential tax liability. If records are insufficient, the cost basis might be treated as zero by tax authorities, leading to higher taxable gains.

For retirement planning, retain records of non-deductible IRA contributions. Form 8606, “Nondeductible IRAs,” reports these after-tax contributions to the IRS. Keeping copies of Form 8606 indefinitely prevents double taxation when distributions are taken in retirement, as the original contributions have already been taxed.

Records of major home improvements also warrant long-term storage. These improvements, such as adding a room or upgrading a kitchen, can increase a home’s cost basis, reducing the taxable capital gain when the property is sold. Receipts, invoices, and canceled checks for qualifying improvements should be kept for as long as the home is owned, plus the three-year period after the sale. This documentation can significantly impact the amount of tax owed on a home sale.