Now that your taxes are filed, you are probably ready to start getting rid of old tax returns, account statements, and other financial documents that have been cluttering up your desk and file cabinets. But before you fire up that shredder, it is important to know how long you should hang on to previous years’ documents.
Seven years to be on the safe side
The bottom line: You should keep your tax and financial documents a minimum of three years, but you should probably keep them seven years just to be safe.
This guideline stems from the statute of limitations for when the IRS can challenge your tax return. If the IRS believes you have made good-faith errors on your return, the IRS has up to three years to challenge your return. If you have underreported income by 25 percent or more, however, the limit is six years. And if your return included a claim for worthless securities or bad debt, the limit is seven years. There is no time limit if the IRS believes fraud was involved or if a return was never filed. The three-year limit also applies if you discover a mistake in a previous year’s return and decide to file an amended return.
The types of documents you should be saving are your tax returns, W-2 and 1099 forms, and other documents used to support the income, deductions, and credits claimed on the return. These supporting documents include:
Credit card statements and receipts
Year-end statements from your bank and brokerage accounts
Canceled, imaged, or substitute checks or any other proof of payment
Statements from charities confirming your gifts
Any other records to support deductions or credits you claim on your return
Don’t pitch home improvement records
Hold on to receipts for major home improvements for as long as you own the home and then at least three years after you sell it.
These receipts will be important in determining the gain or loss you incur on the home sale because improvements you make to the property will cause your “tax basis” to go up, which is a good thing. For example, if you purchase a house for $400,000 in 2012, put on a new roof for $50,000 in 2014, and then sell the house for $500,000 in 2016, your resulting gain would be $50,000. (The first $250,000 of gains for individuals—and $500,000 of gains for married couples—on a home sale is exempt from taxation. But it is still important to track improvements that increase your basis.)
You should also hold on to the statements that record the purchase and sale price of stocks or other investments for at least three years after you sell the asset. Again, these records will be important in determining the capital gain or loss.
Keep IRA contributions forever
Keep records of nondeductible contributions to an IRA indefinitely. When the time comes to make withdrawals from the account, these records allow you to prove that you already paid tax on this money. It is OK to shred the quarterly statements from your retirement accounts if they match up to the annual summaries; it’s these annual summaries that you’ll want to keep until you retire or close the account.
Tax returns can be handy things to have around
The recommendations above are general guidelines, and you may, in fact, want to hold on to your tax returns (or at least a digital archive of them) forever. Tax returns can provide clues about your income, investments, and other financial information that might come in handy to you and your accountant well after the IRS’s statute of limitations expires. Past returns can serve as a valuable record of your financial history.
Finally, be very careful about how you dispose of the records you don’t keep. Shred anything with your Social Security number or credit card number to protect yourself from identity theft.
I hope this article adds some clarity to your spring paperwork cleaning. If you have any questions, please contact Bart Eilts at 773.525.6171 or firstname.lastname@example.org.