I have a confession to make: my records are currently a bit of a mess. I'm generally pretty organized when it comes to financial and tax records (colored folders and very detailed tabs are involved) but this tax season was a bit hectic. As a result, my 2015 tax and financial records are in what could be generously called a haphazard pile in my filing cabinet.
They won't stay that way, of course. Eventually, I'll put my bank statements in chronological order, complete with annotation. I'll sift through my transit and Amtrak tickets. I'll pair my certified mail receipts with their respective letters and staple them together so they won't get separated.
There's also the stuff I will finally convince myself it's time to toss. I know I don't need to keep my Amazon packing slips if I have the original receipts. And I don't need three copies of the same restaurant check.
It's true that the Internal Revenue Service (IRS) wants you to hang on to your important records. But you don't have to keep all of your tax and financial records forever. Here are some tips to help you figure out which records to keep and how long to keep them:
- As a rule, keep your tax records and supporting documentation until the statute of limitations runs out for filing returns or filing for a refund. For most taxpayers, that means that you'll want to keep those records for three years following the date of filing or the due date of your tax return, whichever is later.
- If you don't report all of the income that you should report (generally, if you omit more than 25% of the gross income shown on your return), the statute of limitations is extended: you'll want to keep those records for at least six years. You may also want to get a better tax professional.
- If you file a clearly fraudulent return or if you don't file a return at all, the statute of limitations never actually runs out. That means that there is no time limit on IRS action. In that event, you'll want to hold onto your records forever. And in that case, you absolutely want to get a better tax professional and possibly a defense attorney on speed dial.
- If you file a claim for a credit or refund after you file your return, you'll want to keep your records for three years from the date you filed your original return or two years from the date you paid the tax, whichever is later.
- If you are a partner or S corporation shareholder, the statute of limitations is generally controlled by the date of your individual return.
- If you file an amended return, it does not extend the statute of limitations for your original return. The clock doesn't restart: the original date determines the statute of limitations (some exceptions apply if you file within 60 days of the assessment window).
- You'll want to keep supporting documentation for as long as the statute of limitations runs. Supporting documentation for your tax returns includes not only your Forms W-2 and 1099 but also bills, credit card and other receipts, invoices, mileage logs, canceled, imaged or substitute checks, proofs of payment, and any other records to support deductions or credits you claim on your return.
- Don't forget about those Obamacare requirements. Beginning with the 2014 tax year (the return you filed in 2015), you'll need to keep records of minimum essential health insurance coverage or proof that you qualified for an exemption or premium tax credit (especially if you had to pay it back).
- If you make nondeductible contributions to a traditional IRA, hold onto those records until you make a complete withdrawal/distribution: you don't want to pay tax on those twice. But don't stop there. As a rule of thumb, you should hold onto all IRA records—including Roth contributions—until you withdraw all of the money from the account.
- If you claim depreciation, amortization, or depletion deductions, you'll want to keep related records for as long as you own the underlying property. That includes deeds, titles and cost basis records.
- If you claim special deductions and credits, you may need to keep your records longer than normal (for example, if you file a claim for a loss from worthless securities or bad debt deduction, you should keep those records for seven years).
- If you have employees, including household employees, keep your employment tax records for at least four years after the date that payroll taxes become due or are paid, whichever is later. This should include Forms W-2 and W-4, as well as related pay information including benefit forms.
- If you claim any other special tax benefits not mentioned above (for example, the first time homeowner's credit), a good rule of thumb is to keep your records for as long as the tax benefit runs plus three years.
- If you own property that will result in a taxable event at sale or disposition (like stocks, bonds or your home), you'll want to keep records which support your related tax consequences (capital gains, etc.) until the disposition of the property plus three years. That means, for example, that you should keep records related to your home, including home improvements, for as long as you own the house. Remember that you're entitled to exclude up to $250,000 of gain on the sale of your home ($500,000 if married filing jointly)—so keep excellent records of the cost of the home as well as any improvements or other adjustments to basis.
- If you receive property as the result of a gift or inheritance, you'll want to keep records that support your basis in that property. Generally, if you inherit property, your basis is the stepped up value as of the date of death; if you receive a gift, your basis is the same as the donor's basis. Don't toss those old records just because you're the new owner of the assets.
Keep your records organized—I recommend arranging them by year—and store them in a safe place. If the IRS comes calling, you'll want to be able to produce legible records in a pretty timely manner.
To save space (and quite possibly, your marriage and/or sanity), you can scan your records and store them electronically. The IRS has accepted scanned receipts since 1997, a policy that was memorialized by Rev. Proc. 97–22 (downloads as a pdf). You just need to ensure that your scanned or electronic receipts are as accurate as your paper records and you must be able to index, store, preserve, retrieve, and reproduce the records. In other words, you need to have your records organized and be able to produce them in a hard copy form if needed.
That's a lot to hold onto. Wondering what you can safely toss? Consider:
- Duplicates of receipts.
- Records that are unrelated to deductions and credits not claimed. One of the biggest offenders? Medical receipts when you don't actually claim the medical expenses deduction. You don't need to keep those receipts for tax purposes (you may need them for other personal reasons, however, so don't make everything about tax).
- Old tax returns. Okay, I know this is a bit controversial. Some tax professionals recommend that you never throw out your old tax returns – even when the statute of limitations has already run out – as proof that you've filed. I don't think that's necessary. I started working at age 14. I don't want to die with a filing cabinet filled with 50+ years of tax returns so I toss mine after the statute runs. Find your own level of comfort.
- Paycheck stubs. Check your paycheck stubs against your year-end statements, including your Form W-2 and your annual Social Security statement. Make sure that they properly reflect your income, pre-tax deductions, employee benefits, and the like. Once you've confirmed that they're correct, you don't need to save the stubs.
- Old records. If the statute of limitations has run out, you can generally destroy tax-related records keeping in mind the guidelines as outlined above. A quick word of warning: even if records aren't needed for tax reasons, you may need them for other reasons. Make sure that you check with your mortgage company and tax professional before tossing important records.
One last piece of advice: when you're ready to toss those old records, have a shredder handy. Remember that your records have personally identifying information, as well as details about your finances, that you want to keep private and away from potential identity thieves.