How Many Years of Taxes Should You Save?

Maintaining accurate tax records is an important aspect of financial responsibility for individuals and businesses alike. Proper record retention is necessary for ensuring compliance with tax laws, responding to potential audits, and effectively managing personal financial affairs. Organizing and keeping these documents accessible can simplify future tax filings and provide clarity on past financial transactions.

General Record Retention Periods

Tax record retention periods depend on the activity or event the document records. For most income tax returns, the Internal Revenue Service (IRS) advises keeping records for three years from the date you filed your original return or the due date of the return, whichever is later. This three-year period aligns with the statute of limitations for assessing additional tax or claiming a refund. If you file an amended return to claim a credit or refund, the retention period is three years from the date you filed the original return, or two years from the date you paid the tax, whichever is later.

A longer retention period applies in specific situations. For instance, if you do not report income that you should have reported, and this unreported amount is more than 25% of the gross income shown on your return, the IRS can extend the assessment period to six years. For cases involving fraudulent returns or if no return was filed, there is no statute of limitations, meaning records should be kept indefinitely. While federal guidelines exist, some state tax authorities may have their own retention requirements, making it important to check state-specific rules.

Situations Requiring Longer Retention

Beyond the general guidelines, some situations require keeping records for extended periods. Records related to the basis of property, such as real estate or investments, should be retained for as long as you own the property and for at least three years after you dispose of it. These documents are important for calculating depreciation, amortization, or depletion deductions, and for determining any gain or loss when the property is sold.

Another situation involves claiming a loss from worthless securities or a bad debt deduction. In these instances, you should keep the relevant records for seven years. For employers, employment tax records, including forms like W-2s and W-4s, must be kept for at least four years after the date the tax becomes due or is paid, whichever is later.

What Records to Keep

To support the information reported on your tax return, it is important to retain various documents. Income statements, such as Forms W-2 from employers and Forms 1099 for various types of income like interest, dividends, or freelance work, are key. These forms provide official summaries of income received. Bank statements and investment statements are also important, as they provide a record of financial transactions and can serve as proof of income or expenditures.

Receipts for deductions and credits, such as those for medical expenses, charitable contributions, or business expenses, are necessary to substantiate claims made on your return. Canceled checks and other proof of payment for these expenses should also be kept. For assets, records of purchase and sale, including closing statements for real estate, are important to establish the asset’s basis and calculate any taxable gain or loss upon disposition.

Record Keeping Methods

Organizing and storing tax records efficiently can streamline the process of tax preparation and retrieval for audit purposes. Both physical and digital storage methods are acceptable, provided they are maintained in an organized and accessible manner. For physical records, using labeled folders, bins, or filing cabinets categorized by year and type of document can help keep everything in order. A secure location, such as a fireproof and waterproof container, is advisable for important paper documents.

Digital storage offers flexibility and can reduce physical clutter. Scanning paper documents to create digital copies, such as PDFs, is a common practice. These digital files should be stored on secure platforms, such as cloud storage services or external hard drives, and regularly backed up to prevent data loss. The IRS accepts legible digital copies, ensuring clarity and completeness is important. Maintaining an organized folder structure for digital files, perhaps by year and then by category (e.g., income, deductions), allows for quick retrieval of specific information.