Once you’ve completed all the hard work of filing your taxes, you might want to immediately forget all the numbers, forms and receipts you had to comb through to satisfy the government. However, when you finish filing your taxes, you still have one more important step to check off your list: Put all your documents somewhere safe.
As you’re working on your taxes, it’s crucial to remember that you may need to access them again in the event of an audit by the IRS. With that in mind, a shoebox with loads of papers or files scattered throughout your hard drive is not a good move. Instead, start a filing system that organizes all your records by year and by category, such as bank statements, income forms and receipts. Throughout the year, make sure you’re maintaining that system so that everything makes sense when you file – and if the IRS requests something from the past, you’ll be able to track it down quickly. If you’re still dealing with a heavy amount of paper, there are plenty of apps to digitize and simplify your life, such as Expensify or CamScanner.
How long to keep your current records
How long do you need to keep all these documents? That varies based on a few factors. While the timelines below reflect federal guidelines, it’s important to note that your state tax authority might operate with different standards.
“Even if you don’t need to retain some records for federal tax purposes, you might want to save them for other reasons,” says Alison Flores, principal tax research analyst, The Tax Institute at H&R Block. “Your state may have a longer time to audit. For example, California generally has four years to audit a state income tax return. Also, an insurance company or creditor may have different record-keeping requirements.”
If you’re a standard employee who receives a W-2 and your taxes aren’t overwhelmingly complicated, your timing can likely be short.
“In general, you should keep your tax records for at least three years after the date in which you filed, according to the IRS statute of limitations,” says Lisa Greene-Lewis, CPA and tax expert with TurboTax. “Three years is the time you have to claim any tax refund owed to you, and it is the time that the IRS will generally go back if they need more information and substantiation of what you claimed on your taxes.”
Greene-Lewis says that rule also applies to self-employed and freelance workers with one exception: If you claim the sale of some type of equipment for your business, you will need to keep them until the three-year statute is up after the year you sell it.
That three-year rule doesn’t apply to everyone, though.
“There are exceptions to this statute,” Flores says. “If you omit more than 25 percent of your gross income from your return, the IRS has six years to assess an additional tax. And if you file a fraudulent return, the statute never expires.”
Even if you can’t remember what exactly you were doing seven years ago, you may need to offer a picture of what you were spending money on to the IRS. Greene-Lewis says that any records related to retirement accounts should be held for seven years after you withdraw the money.
“If you claim a bad debt deduction or have a loss on a worthless security,” Greene-Lewis adds, “then, you should also hold onto the records for seven years after the date you filed.”
Tax-related documents you need to keep
Generally, the IRS recommends keeping all documents that prove how much income you earned and anything that supports credits or deductions you claim. Don’t worry about keeping every single document, though. For example, your W-2 form will summarize how much you’ve earned, so you do not need to file away every single pay stub.
Here is a rundown of some of the basic tax documents you should keep on file for three years, provided you have been filing honest, complete returns every year. And if you’re lying on your tax returns, well, you might want to call a lawyer instead of reading this article.
Your taxes start with how much you made, so keep a record of all the dollars you were paid in a given year.
- W-2 forms
- 1099 forms
- K-1 forms
If you’re a self-employed or freelance worker, it’s especially crucial to keep evidence of all the money you had to spend to keep your business going.
- Sales slips
- Canceled checks or other proof of payment
- Annual bank statements (Check with your bank to see if these are also stored in your online banking account)
Buying and selling a home comes with big tax implications.
- Closing statements
- Purchases and sales invoices
- Proof of payment
- Insurance records
- Mortgage interest deduction forms
If you’re earning extra cash from your investment portfolio, those documents need to be preserved, too.
- Annual brokerage statements
- 1099 forms
- 2439 forms
As you plan for retirement, plan to keep the IRS informed of how your funds are doing.
- Form 5498, Roth and traditional IRA contributions
- Form 8606, nondeductible IRA contributions
- Annual statements
- 401(k) and other company-sponsored plan statements
- Form 1099-R distribution records
When you file your taxes, you don’t have to submit proof of your insurance. However, you could still need to show the IRS that you were covered.
- Form 1095-A (Health insurance marketplace statement)
- Form 1095-B (Health coverage)
- Form 1095-C (Employer-provided health insurance offer and coverage)
- Insurance cards
- Statements from your insurance provider
- Payroll statement that shows money was deducted for your health insurance
- Time limit exceptions
What happens if you don’t hang on to them
What’s the worst thing that can happen if you lose your records? You might owe more money.
“If you are ever asked for them and you don’t have them, you may have problems substantiating what’s on your tax return,” Greene-Lewis says. “Certain deductions and credits could be denied.”
How to get rid of your tax records
When it’s finally time to wave goodbye to that mountain of paperwork, it’s important to remember that getting your tax documents would be a criminal’s dream come true. These documents include your name, address, Social Security number and all the information needed to steal your identity, so getting rid of them requires extra attention.
“When you dispose of tax records, make sure you keep your information safe,” Flores says. “Shred paper documents and wipe electronic records before disposing of old electronics to protect yourself from identity theft. Whether you retain paper or electronic documents, ensure they are safe and secure and keep an encrypted back-up.”
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