If your personal file cabinet is overflowing with old tax records, credit card bills, or bank statements, you might be wondering what to keep and what to trash. When it comes to taxes especially, many people hesitate to toss important documents for fear of an IRS audit.
It begs the question: How long should you keep tax documents? And are there any you should save indefinitely?
Here’s how long to keep specific tax documents and how to properly dispose of them when the time comes.
What tax documents do I need to keep?
While it might be tempting to trash all your old tax forms after tax filing season, good recordkeeping is smart. You’ll want to retain the following documents for at least three years, but possibly longer — we’ll discuss specific time frames shortly.
- Tax returns
- W-2s
- 1099s from capital gains, dividends, self-employment earnings, or bank interest
- 1098s from mortgage interest deductions
- Additional supporting documentation for deductions and credits
- Supporting documentation for distributions from 529s, health savings accounts, or retirement accounts
- Supporting documentation for tax-deductible contributions to a retirement savings account, such as a traditional IRA
- Receipts for charitable donations
- Supporting documentation for the sale and purchase of assets in a taxable brokerage account
- Property tax assessments
- Mortgage documents, including your settlement statement
- Receipts for home improvements
Why should I keep tax returns for three years?
Under normal circumstances, the IRS recommends keeping your past tax records for three years from when you file or from the current year’s tax due date. That’s because if you’re audited, you’ll typically need to provide copies of your federal tax returns from the past three tax years. This is the statute of limitations that the IRS applies in typical tax situations.
But there are some exceptions to this three-year rule, especially if the IRS identifies a serious problem with your original return. In this case, the IRS can request additional tax returns. For instance, if you fail to report over 25% of your gross income on your taxes — even if it’s unintentional — the IRS can request up to six years of income tax returns.
There’s no statute of limitations for taxpayers who file a fraudulent return or don’t file taxes at all. In those situations, the IRS can request as many years of tax returns as it deems necessary.
The time frame for retaining state tax returns varies based on where you live. For instance, the state of California’s statute of limitations for a tax audit is four years, which means you’ll want to keep your tax returns for at least four years if you reside there.
Are there any tax documents I should keep longer?
In addition to the uncommon tax scenarios mentioned, there are other situations when you may want to retain certain documents longer.
If you file taxes in another country besides the United States, for example, you might qualify for a foreign tax credit on your U.S. returns. The IRS gives you up to 10 years to claim this credit, so you might need to keep related tax documents for up to a decade. If you’re an investor, you also have up to seven years to claim bad debt deductions for worthless securities.
You might also decide to keep your W-2s indefinitely to help calculate future Social Security payments. You’ll want to keep any documents related to the purchase of your home for as long as you own it, including loan agreements and your settlement statement that itemizes your closing fees. These will be useful for calculating the taxes you’ll pay when you sell.
A home sale could result in a hefty tax bill if your property has appreciated in value significantly since you bought it. The IRS looks at the difference in the initial purchase price of your home and its final sale price to help calculate your capital gains tax. But that’s not the only thing it considers; it also looks at the cost of any capital improvements you made to your home and other expenses such as any legal or recording fees you paid when you bought your property. Those amounts, minus depreciation, are your cost basis. And generally, the higher your cost basis, the lower your burden when you sell your house.
It makes sense to keep any mortgage or closing documents for your home or any investment properties you own for the duration of your ownership.
How to properly dispose of tax documents
Burning and shredding are the best ways to dispose of old tax returns or other important documents. This ensures your personal and financial information remains private. Avoid putting tax returns or other personal documents in your trash or recycle bin as this could put you at risk of identity theft.
If you keep tax records on a hard drive, you should delete all files before throwing out the drive.
