How Long Should You Keep Your Tax Records?
By Mitchell J. Smilowitz, CPA
You’ve finished your taxes and now have a box, folder or pile of receipts and records. How long should you keep them? Which documents should you keep? How should they be stored? This article helps you answer these questions.
How Long?
Based on the IRS statute of limitations, in most cases you should plan on keeping tax returns along with any supporting documents for three years following the date you filed your tax return or the due date of the return, whichever is later.
There are situations where you need to keep your records for more than three years. If you are self-employed, keep employment tax records for at least four years after the date that the tax becomes due or is paid, whichever is later. Keep records for six years if you inadvertently did not report income that should have been reported and it was more than 25% of the gross income shown on your return. If you file a fraudulent return or don’t file one at all the statute of limitations never expires.
What Records Should You Keep?
For an individual tax return, the general guideline is to save anything that supports what you report on your return. This includes:
- Form W-2 – the wage and tax statement from your employer
- Form 1099-NEC – payments made to you as a self-employed individual
- Form 1099-B – capital gains and losses
- Form 1099-G – overpayments of state and local taxes
- Form 1099-INT – interest income
- Form 1099-DIV – dividend income
- Form 1099-R – distributions from a retirement account or annuity
If you itemize your deductions, keep credit card and other receipts, invoices, mileage logs and canceled checks that support the deductions you claim. If you've bought or sold mutual fund shares, stocks or other securities outside of a retirement plan, keep confirmation slips or brokerage statements that say how much you paid for the investments and how much you received when you sold them.
If you've sold a home, you'll need records that prove what you paid and what you received from its sale. If you've sold a rental property, you'll need detailed records of the amount you've invested in the property over the years, as well as how much you deducted for depreciation. It's wise to keep Schedule E, the form you fill out every year for rental income, as long as you own the property. For example, if you own a rental property for 10-years, it is good practice to keep the Schedule E for each of those years.
How and Where Should You Store Your Tax Records?
The best way to store hard copies of tax documents is in a fire-proof safe or safety deposit box. This is also the place to store other important documents like the deed to your house, mortgage and insurance information and your Will or trust documents. Make sure your spouse or other trusted person knows how to access this information.
Finally, it’s a good idea to scan your documents and keep a backup on an encrypted hard drive or in the cloud. You’ll have a second set of your tax records that doesn’t take up much space. You can keep the digital copy even after you shred the paper copies. Finally, remember that your state may have different rules for keeping records; check with your accountant or state tax department.
Conclusion
Maintaining proper tax records is an essential part of doing your taxes. The general principle is to keep any records you need to support the information reported in your tax return. Most tax records can be discarded after three years, but some, like property records and investment transactions, need to be kept longer. The more complex your return, the more complex your record storage requirements may be. Digitizing your records and storing them in the cloud or a back-up drive allows you to keep a second set without adding to the clutter. Check with your tax preparer on what records you are required to keep. Please contact the JRB via email or call 888-JRB-FREE (572-3733) for questions about this article.
April 2023