Why You Should Keep Your Receipts and For How Long

Receipts, whether paper or digital, serve as proof of transactions and provide a history of spending and income. They establish a verifiable trail for financial activities, important for sound financial management.

Why Receipts Are Important

Receipts are instrumental in tax documentation, serving as evidence for potential deductions, credits, and income reporting. For instance, medical expenses, charitable contributions, or business-related costs for self-employed individuals require receipts for substantiation.

Receipts are important for consumer protection, proof of purchase for product returns, exchanges, or warranty claims. Retailers require a receipt to process these actions, verifying ownership, transaction details, and purchase date. Relevant for larger purchases with extended warranties.

Receipts serve as a tool for budgeting and expense tracking. By reviewing and categorizing spending, individuals can monitor financial outflow, identify spending patterns, and adjust budget. This insight helps identify areas for potential savings and fosters financial discipline.

Retaining receipts is a safeguard against financial discrepancies and fraud. They enable you to cross-reference transactions with bank or credit card statements, helping identify unauthorized charges or billing errors. Receipts are required for expense reimbursements from employers or other entities, providing documentation to justify and process out-of-pocket business costs.

What Receipts to Prioritize

Receipts directly related to tax purposes warrant high priority. These include documentation for medical and dental expenses, charitable contributions, and educational expenses such as tuition and student loan interest. For self-employed individuals, receipts for business expenses like office supplies, utilities, travel, and meals are essential for deductions. Receipts for home improvements are for adjusting a property’s cost basis, potentially reducing future capital gains taxes upon sale.

Receipts for major purchases like electronics, appliances, or furniture should be prioritized. These serve as proof of purchase for warranty claims or returns, for items with significant cost or extended warranty. Purchases that might need to be returned or exchanged, such as clothing, should be kept until the return window closes.

Receipts and other records that verify income sources are important. This includes documentation like 1099 forms, bank statements showing business deposits, and invoices or profit and loss statements. These documents are for substantiating earnings for tax purposes, loan applications, or rental agreements.

How Long to Retain Receipts

The duration for retaining receipts varies by purpose, with tax-related documents requiring the longest retention. For most everyday receipts not tied to specific tax deductions or major purchases, keep them for 30 to 90 days to allow for returns or verification against bank statements.

For tax purposes, the Internal Revenue Service (IRS) has a three-year statute of limitations to audit a tax return, starting from the later of the return’s filing date or its due date. Keep supporting tax documents, including receipts for deductions and income, for at least three years from the filing date. This period extends to six years if there is a substantial underreporting of gross income. In cases of fraudulent returns or failure to file, there is no statute of limitations, and the IRS can audit indefinitely.

Receipts related to the purchase and sale of assets, such as real estate, stocks, or other investments, should be kept for even longer. These records are necessary to determine the cost basis, used to calculate capital gains or losses when the asset is sold. Retain these receipts until the statute of limitations expires for the tax year the asset was disposed of, which could be many years after the initial purchase. For items with warranties, receipts should be kept for the entire warranty period.

Organizing and Storing Receipts

Organizing and storing receipts involves establishing a system. For physical receipts, common methods include using accordion files, binders, or dedicated folders, often labeled by category or date. A consistent system, whether by vendor, expense type, or chronologically, ensures easy retrieval and prevents disorganization. Protect receipts from damage, as many are printed on thermal paper that can fade over time.

Transitioning to digital storage offers advantages, including reduced clutter and accessibility. Receipts can be scanned using a home scanner or captured with a smartphone camera through mobile apps. These digital images can be stored in cloud services or on a computer, within structured folders labeled by year, category, or expense type. Many personal finance or expense tracking applications offer features for capturing, categorizing, and storing digital receipts, sometimes even extracting data automatically.

Regardless of the chosen method, maintaining consistency is important. Establishing a routine for processing and filing receipts, whether daily or weekly, prevents a backlog of documents and ensures records are up-to-date. For digital records, regular backups to an external hard drive or a separate cloud service safeguard against data loss. Protecting sensitive information on receipts, such as partial credit card numbers, is a consideration for secure storage.