How Many Years Should You Keep Tax Returns?

Maintaining accurate tax records is a fundamental practice in personal financial management. These documents provide proof of the income, deductions, and credits reported on your tax return. Proper record-keeping is important for responding to inquiries from tax authorities or in the event of an audit, ensuring you can substantiate the figures on your return.

Standard Retention Periods

The Internal Revenue Service (IRS) operates under a three-year statute of limitations for assessing additional tax. This period begins from the later of the date you filed your original tax return or its due date. For instance, a return filed on April 1, 2024, for the 2023 tax year, would have its three-year period expire on April 15, 2027.

During this three-year window, the IRS can audit your return and assess additional taxes. Taxpayers also have this same three-year period to file an amended return to claim a refund if they discover an overpayment. Keep all supporting documentation for this entire timeframe, even if you later amend your return.

Situations Requiring Longer Retention

Certain financial circumstances require retaining tax records for periods exceeding the standard three years. One situation involves a substantial understatement of gross income, such as omitting more than 25% of your reported gross income. In this case, the IRS statute of limitations extends to six years.

If you claim a loss from worthless securities or a deduction for bad debt, keep related records for seven years. These deductions require a longer evidentiary trail to support their validity.

Some records require indefinite retention due to the absence of a statute of limitations. This applies if you filed a fraudulent return or failed to file a tax return. Records related to the basis of property, such as a home, stocks, or other assets, should be kept for at least three years after the property is sold and the gain or loss is reported. Retain purchase documents, records of improvements, and sale confirmations to accurately calculate capital gains or losses upon disposition. Check specific state guidelines, as state tax laws may have different retention periods.

Documents to Keep with Your Tax Return

A comprehensive collection of documents should be retained alongside your filed tax return to support the figures reported. Income records are fundamental and include Forms W-2, detailing wages and withheld taxes, and various Forms 1099, such as 1099-INT for interest income, 1099-DIV for dividends, 1099-MISC for miscellaneous income, and 1099-R for retirement distributions. Any Schedule K-1s received for partnership or S-corporation income should also be kept.

Records supporting deductions and credits are equally important. This encompasses receipts for itemized deductions, like medical expenses and charitable contributions, and statements such as Form 1098 for mortgage interest paid. Documentation for education credits, often found on Form 1098-T, and receipts for dependent care expenses should also be maintained. For investments, keep brokerage statements and confirmations of stock or bond purchases and sales, as these establish cost basis and transaction dates.

Records for major assets, including closing statements from real estate transactions and receipts for home improvements, are necessary to determine the cost basis when the property is eventually sold. Vehicle purchase records are also important, particularly if the vehicle is used for business purposes. Bank statements and canceled checks serve as proof of income or payment for expenses. For self-employed individuals, a detailed record of all business income and expenses, including invoices, receipts, and mileage logs, is essential for substantiating reported figures. Finally, a complete copy of the actual filed tax return, including all supporting schedules, should always be retained.

Secure Storage and Disposal

Proper management of tax records involves both secure storage and eventual careful disposal. Physical documents can be stored in secure filing cabinets or fire-resistant boxes to protect them from environmental hazards like fire or water. For digital records, using encrypted external hard drives or reputable cloud storage services offers a secure alternative to physical paper.

Security measures are paramount for both physical and digital formats. Physical documents containing sensitive personal information should be shredded using a cross-cut shredder when they are no longer needed to prevent identity theft. For digital files, password protection and encryption are advisable, and regular backups to multiple secure locations should be performed. When disposing of digital files, simply deleting them is insufficient; they should be securely erased using specialized software or by overwriting the data to ensure they cannot be recovered. Organizing records by tax year or category can significantly streamline retrieval if information is needed for future reference or an audit, and documents should only be discarded after the relevant retention period has fully elapsed.