Should You Save Your Receipts for Taxes?

Saving receipts and other financial documents provides the necessary evidence for income, deductions, and credits claimed on a tax return. Record-keeping ensures compliance with tax regulations and simplifies the process of preparing annual tax filings. It also prepares individuals for potential inquiries from tax authorities.

Why Record Keeping is Important

Maintaining thorough records is a taxpayer’s responsibility. Records provide substantiation for the figures reported on a tax return, proving the accuracy of reported income and the legitimacy of deductions and credits. The burden of proof for all entries on a tax return rests with the taxpayer.

Accurate record-keeping ensures that the correct amounts are used when calculating tax liabilities or refunds. Without proper documentation, taxpayers might inadvertently overpay taxes by missing eligible deductions or underpay, which could lead to penalties. Records also help taxpayers identify all sources of income and track deductible expenses throughout the year.

Should a tax authority, such as the Internal Revenue Service (IRS), select a return for audit, records are necessary. They allow taxpayers to respond to inquiries and substantiate claims, potentially avoiding the disallowance of deductions or credits and the assessment of additional taxes or penalties.

Key Records for Tax Purposes

Individuals should retain financial documents to prepare and support a tax return. Income records include Forms W-2 from employers, Forms 1099 (interest, dividends, independent contractor income, retirement distributions), and Schedule K-1s for those with interests in partnerships or S corporations. Records of cash income, such as from side gigs, should also be maintained.

For potential deductions and credits, expense records are necessary. If itemizing deductions, taxpayers need documentation for medical expenses, including receipts for services, prescriptions, and insurance statements. Medical expense deductions under Internal Revenue Code Section 213 require documentation, including the payee’s name and address, payment amount, and date.

Charitable contributions require receipts or written acknowledgments from the organization. For cash donations of $250 or more, a contemporaneous written acknowledgment detailing the contribution and any goods or services received is needed. Property tax bills and mortgage interest statements (Form 1098) support homeownership deductions.

Self-employed individuals must keep records of business expenses, such as receipts for supplies, mileage logs, and home office expenses. Receipts should include the seller’s name, date, description of the product or service, amount paid, and method of payment. For education expenses, Form 1098-T and receipts for books and supplies are important. Dependent care expenses require receipts from care providers.

Investment records include brokerage statements and records of stock or bond purchases and sales to determine cost basis and calculate capital gains or losses. Records of home improvements should be kept to adjust the cost basis of a home, which can impact gain or loss calculations upon sale. Other documents include bank statements, credit card statements, cancelled checks, and copies of previous tax returns.

Practical Record Retention Guidance

The length of time to keep tax records depends on the period of limitations, the timeframe for the IRS to assess tax or a taxpayer to claim a refund. For most income tax returns, this period is three years from the date the return was filed or two years from the date the tax was paid, whichever is later.

Exceptions extend this period. If there is substantial underreporting of gross income, the IRS has six years to initiate an audit. Keep records for six years in such cases. Records related to property, such as purchase and sale documents or home improvement receipts, should be kept until the period of limitations expires for the year in which the property is disposed of.

Records for bad debt deductions or losses from worthless securities should be kept for seven years. If a tax return was never filed or was filed fraudulently, there is no statute of limitations, meaning records should be kept indefinitely. Employment tax records must be kept for at least four years after the tax was due or paid.

For storing records, both physical and digital methods are acceptable to the IRS. Physical documents should be organized in clearly labeled folders and stored in a secure location.

For digital storage, scanning physical receipts into digital formats is an option. Digital files must be clear, legible, complete, and easily accessible, accurately representing the original documents. Cloud storage or external hard drives with regular backups ensure data security and retrieval. A consistent naming convention for digital files assists in organization and retrieval.