Now that the tax season is over (unless you file an extension), it’s the perfect time to organize your tax-related documents. It’s best to keep these documents for at least three years after the due date of your tax return (the IRS usually has this much time to initiate an audit). Also, consider keeping some records for longer periods and retaining copies of your tax return indefinitely. Additionally, it is wise to keep certain documents, such as W-2 forms, for non-tax purposes. Here’s a quick guide to help you determine how long you should keep some common tax records and documents.
Keep One Year
It is recommended to keep your pay stubs until you cross-check them with your W-2s. Once you have verified that all the figures match, you can safely dispose of the pay stubs. Similar to this, you can discard your monthly brokerage statements if they match up with your year-end statements and 1099s.
Keep Three Years
In general, it’s recommended that you keep documents supporting your tax return claims for at least three years after the tax-filing deadline. This includes W-2 and 1099 forms, canceled checks and receipts for charitable contributions, records of eligible expenses for withdrawals from health savings accounts and 529 college savings plans, and records of contributions to tax-deductible retirement savings plans. However, if you do not itemize Schedule A deductions, you may not need to keep as many documents. For instance, if you are not claiming charitable contributions, there is no need to keep donation receipts or canceled checks for tax purposes.
Keep Six Years
The Internal Revenue Service (IRS) has a time limit of six years to start an audit if you have yet to report a minimum of 25% of your income. This can be a problem for self-employed individuals who may receive multiple 1099s reporting business income from various sources, leading to missing or overlooking reporting of some income. To avoid any issues, self-employed individuals should keep their 1099s, receipts, and other records of business expenses for at least six years. Additionally, if you fail to report $5,000 or more of income from foreign financial assets, the IRS can assess tax on that income within six years of the return filing date. Therefore, keeping records related to such income is best until the six-year window is closed.
Keep Seven Years
Sometimes, despite our best efforts, things go differently than planned. For instance, you may have invested in some stocks that didn’t perform well or loaned money to someone who couldn’t repay you. However, there is still hope. You may be able to write off these bad debts or worthless securities. It’s essential to keep accurate records and documents for at least seven years to claim a deduction or loss during this time frame.
Keep Ten Years
If you have paid taxes to a foreign government, you may receive a credit or deduction on your U.S. tax return. The choice of credit or deduction is entirely yours. You can modify your deduction claim within ten years and request a credit by submitting an amended return. You have a decade to rectify a foreign tax credit claimed earlier. Therefore, it’s advisable to keep all records and documents pertaining to foreign taxes paid for at least ten years.
Investments and Property
It’s important to hold onto investment and property records for at least three years after selling. For example, keep records of contributions to a Roth IRA for three years after emptying the account to prove that taxes were already paid on the contributions. Also, hang onto investing records, such as transaction records, for up to three years after selling taxable account purchases to establish your cost basis when you file taxes. This will help determine your taxable gains or losses when you sell the investment. Remember, brokers are required to report the cost basis of certain investments purchased in recent years. However, it’s recommended to maintain your records if you switch brokers.
You should retain all investment records that document purchases in taxable accounts, including transaction records for stocks, bonds, mutual funds, and other investments, for a period of up to three years after selling the investments. These records will be useful when you file your taxes for the year of sale, as you will need to report the purchase date and price to establish your cost basis. This cost basis will determine your taxable gains or losses for the investment. For stocks purchased in 2011 or later, and for mutual funds and exchange-traded funds purchased in 2012 or later, brokers are required to report the cost basis.
To ensure that you have all the necessary documentation for tax purposes, keep your home-purchase documents and receipts for any home improvements for at least three years after selling your home. Although most people won’t have to pay taxes on home-sale profits, it’s important to keep your records in case you sell your home before the two-year mark or if your gains exceed the exclusion limit. By adding the cost of significant home improvements to your basis, you can help reduce your tax liability. The same rules apply for any rental properties you own, so be sure to save records related to your basis for at least three years after selling the property. For more information on this topic, refer to IRS Publication 523.
State Record Retention Requirements
Remember to review your state’s tax record retention guidelines as well. The state’s tax authority may have more time to examine your state tax return than the IRS has to examine your federal return. For example, the California Franchise Tax Board has up to four years to audit state income tax returns, so California residents should keep relevant records for at least that duration.