How Many Years of Taxes Should You Keep?

Keeping accurate records is an important part of managing personal finances and fulfilling tax obligations. Proper documentation simplifies the annual tax preparation process, making it easier to accurately report income and claim eligible deductions or credits. Maintaining organized records also provides a reliable resource for verifying information reported to tax authorities if questions arise.

IRS Recommendations for Retention Periods

The Internal Revenue Service (IRS) provides specific guidelines for how long taxpayers should keep their records. These retention periods cover the statute of limitations, the timeframe during which the IRS can assess additional tax, issue a refund, or take collection action. The most common recommendation is to keep records for three years from the date you filed your original return or the due date of the return, whichever is later. This period allows the IRS to audit your return.

A longer retention period of six years applies if you omit more than 25% of your gross income from your tax return. This extended period grants the IRS additional time to identify and address significant understatements of income. For instance, if you reported $50,000 in gross income but actually earned $70,000, the IRS would have six years to audit that return.

Taxpayers are advised to keep records indefinitely in certain circumstances. This applies to situations involving fraudulent returns, where there is no statute of limitations for assessment. Similarly, if you do not file a return, the IRS can assess tax at any time, making indefinite retention of relevant income and expense records prudent.

Records related to property, such as your home or investments, require a different retention strategy. Keep these records for at least three years after you sell or dispose of the property. This period ensures you have documentation to determine the property’s cost basis, calculate any gain or loss from the sale, and support that information in case of an audit. For example, home improvement records should be kept until three years after the sale of the home, as they can reduce taxable gain.

For individuals who employ household workers, a four-year retention period applies to employment tax records. These records include information related to wages paid, taxes withheld, and forms filed, like Schedule H (Household Employment Taxes). This period ensures compliance with employment tax regulations and provides necessary documentation for inquiries.

What Records to Retain

Retaining specific financial documents is important for accurate tax reporting and supporting claims on your tax return. Income records are fundamental, encompassing documents like Form W-2, which reports wages and withheld taxes from employers. Statements from financial institutions, such as Form 1099-INT for interest income, Form 1099-DIV for dividends, and Form 1099-B for proceeds from broker and barter exchange transactions, are essential. If you receive income as an independent contractor, Form 1099-NEC detailing nonemployee compensation is necessary, as are Schedule K-1 forms from partnerships, S corporations, or estates and trusts.

Documentation for expenses is important, especially if you plan to claim deductions. This includes detailed receipts for medical expenses, charitable contributions, and work-related out-of-pocket costs if you qualify to itemize. Canceled checks, credit card statements, and bank statements can also serve as proof of payment for various deductible expenses. For business owners or self-employed individuals, comprehensive records of all business-related income and expenses are necessary for accurately determining taxable profit.

Records establishing the cost basis of assets are important for calculating capital gains or losses when those assets are sold. For investments like stocks or mutual funds, purchase confirmations and annual statements from brokerage firms provide details on acquisition cost and any reinvested dividends. For real estate, documents such as the closing statement from the purchase, records of significant home improvements, and receipts for any additions or renovations contribute to the property’s adjusted basis.

Documents supporting eligibility for tax credits are necessary. This can include tuition statements (Form 1098-T) for education credits or adoption expense records for the adoption credit. Any documentation that substantiates a claim for a specific tax credit should be kept. These documents provide the evidence needed to justify the reduction in your tax liability.

Organizing and Storing Your Tax Records

Establishing an organized system for your tax records simplifies retrieval and keeps sensitive information secure. For physical documents, a filing cabinet or secure storage box with clearly labeled folders for each tax year provides an effective method. Separating documents by category within each year, such as income, deductions, and asset records, can further streamline the organization process.

Digital storage offers a convenient and space-saving alternative for managing tax records. Scanning physical documents and saving them as digital files, such as PDFs, allows for electronic access. Use secure cloud storage services or encrypted external hard drives to protect these sensitive files. Regularly backing up your digital tax records to multiple locations helps prevent data loss.

Protecting your personal and financial information is important, whether your records are stored physically or digitally. Physical documents containing sensitive data, such as Social Security numbers or bank account details, should be kept in a locked cabinet or secure location. For digital files, using strong, unique passwords for storage accounts and enabling two-factor authentication adds security. Regularly reviewing security settings and remaining vigilant against phishing attempts can help safeguard your tax information from identity theft.