If your personal file cabinet is overflowing with old tax records, credit card bills, and bank statements, you may be wondering which documents to keep and which ones to toss. This is especially true when it comes to tax-related paperwork, as many people hesitate to dispose of anything in case of an IRS audit.
So, how long should you hold on to tax documents? And are there any you should keep indefinitely? Here’s a guide on how long to keep specific tax documents and the best way to dispose of them when it’s time.
Which Tax Documents Should You Keep?
While it may be tempting to toss old tax forms after filing season, maintaining good record-keeping is essential. Here are the key documents you should keep for at least three years, though some might need to be retained for longer:
- Tax returns (Form 1040)
- W-2s (Wage and Tax Statements)
- 1099s (e.g., for capital gains, dividends, self-employment earnings, or bank interest)
- 1098s (Mortgage Interest Statements)
- Documentation supporting tax deductions and credits
- Records for distributions from 529 plans, health savings accounts (HSAs), or retirement accounts
- Documentation for tax-deductible contributions to retirement savings accounts, like a traditional IRA
- Receipts for charitable donations
- Documents related to the sale or purchase of assets in taxable brokerage accounts
- Property tax assessments
- Mortgage documents, including settlement statements
- Receipts for home improvements
Why Should I Keep Tax Returns for Three Years?
The IRS generally recommends keeping your tax records for at least three years from the date you file or from the due date of the current year’s tax return. This is because the IRS typically audits tax returns from the past three years.
However, there are exceptions to this rule. If you fail to report more than 25% of your gross income (even unintentionally), the IRS can extend the audit period to up to six years. Additionally, if you file a fraudulent return or fail to file taxes altogether, the IRS has no statute of limitations and can request as many years of tax returns as necessary.
The time frame for retaining state tax returns may vary based on your location. For example, in California, the statute of limitations for a tax audit is four years, so it’s recommended to keep your state tax returns for at least that long if you live there.
Are There Any Tax Documents I Should Keep Longer?
In certain circumstances, you may need to retain documents longer than the standard three years:
- Foreign Tax Credits: If you pay taxes to another country and claim a foreign tax credit on your U.S. return, the IRS allows you up to 10 years to claim this credit.
- Bad Debt Deductions: Investors can claim bad debt deductions on worthless securities up to seven years after the loss.
- Social Security Calculations: You may want to keep your W-2s indefinitely, as they are helpful for calculating future Social Security benefits.
- Home Purchase and Improvement Documents: Keep documents related to your home purchase and improvements as long as you own the property. This includes loan agreements, settlement statements, and receipts for home improvements. These documents are essential for calculating taxes when you sell your home, especially if there has been a significant appreciation in value. The IRS considers your home’s initial purchase price, improvements, and other costs to determine your capital gains tax. The higher your cost basis, the lower your tax burden when selling.
How to Properly Dispose of Tax Documents
When it’s time to dispose of old tax records, privacy and security should be a priority. The best methods for shredding or burning documents are:
- Shred paper documents: Use a cross-cut shredder to destroy paper tax returns and other sensitive documents.
- Burn sensitive papers: If you prefer, you can burn old tax records to ensure they are completely destroyed.
- Delete digital files: If you store tax records on a hard drive, make sure to delete the files completely before discarding the drive to avoid any potential identity theft.
Never throw tax returns or sensitive financial information in the trash or recycling bin, as this can expose you to identity theft. Proper disposal is crucial to protecting your privacy.
By following these guidelines, you can ensure that your tax documents are retained for the appropriate period and disposed of securely when they’re no longer needed.
Investment advisory services offered through Foundations Investment Advisors, LLC (“Foundations”), an SEC registered investment adviser. The views, statements and opinions expressed herein are those of the author, and not necessarily of Foundations or their affiliates. The content provided is for educational purposes only and the views reflected are subject to change at any time without notice. No investment, legal or tax advice is provided. Always consult with a professional. Foundations deems reliable any statistical data or information obtained from third party sources that is included in this article, but in no way guarantees its accuracy or completeness.