After that the receipts have been entered and the checks have been written, you may be faced with a lot of paper after Tax Day. When it comes to taxes, many taxpayers are hesitant to throw away even the tiniest scrap. While it’s true that you want to keep important records, don’t be afraid to toss out what you don’t need. Here’s your quick guide to what to keep and what to throw out after Tax Day.
The general rule is that you should hold onto your tax returns and the supporting documentation until the statute of limitations runs for filing your tax returns, or filing for your tax refund. Supporting documentation for your tax returns includes not only your forms W-2 and forms 1099, but also credit card and other receipts, invoices, mileage logs, copies of checks, proofs of payment, and any other records to support income, deductions, credits, or tax breaks you reported or claimed on your return.
So what is the statute of limitations for your tax return?
- If you file a correct and timely tax return, the statute of limitations is generally three years* after the date of filing or the due date of your tax return, whichever is later. Keep in mind that you file your tax return after the tax year ends. That means, for example, that the statute of limitations for a timely filed 2017 tax return (the tax year ending December 31, 2017) begins to run on April 18, 2018 (because of that last-minute extra day). You’ll want to keep those records until at least April 18, 2021.
- *There have been instances where the IRS has aggressively pursued a six-year statute of limitations. As a result, some tax professionals routinely advise their clients to assume a six-year statute of limitations. However, the official rule under section 6501 is three years for a timely filed return.
- If you don’t properly report all of your income (generally, if you omit more than 25% of the gross income shown on your return), the statute of limitations will be extended. In that case, you’ll want to keep those records for at least six years after the filing date. 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 runs. That means that there is no time limit on IRS action, and they can audit you at any time. 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 criminal defense attorney.
- If you commit a tax crime, the statute of limitations is typically six years from the date of the commission of the crime.
- If you have a foreign asset, and the amount of income from that asset exceeds $5,000, the statute of limitations is extended to six years.
- If you file an amended return, the statute of limitations for your original tax return applies. Filing an amended return does not extend the statute of limitations.
Occasionally, you’ll have documentation to support transactions that will be reported on future tax returns. Records that may need special attention include:
- Consider retaining your IRA records – including Roth contributions – until you withdraw all of the money from your account.
- If you buy capital assets like stocks, bonds, or real estate, you’ll want to keep records which support basis (typically your purchase price plus any adjustments) for as long as you own the property plus three years.
- If you claim depreciation, amortization, or depletion deductions for certain assets including land or real estate, you’ll want to keep related records for as long as you own the underlying property plus three years.
- If you claim special tax deductions and tax 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 household employees, like a nanny, keep those employment tax records for at least four years after the date that payroll taxes become due or is paid, whichever is later. This should include forms W-2 and W-4, as well as related pay information such as benefit forms.
- 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, so hold onto any appraisals or inheritance tax returns that substantiate those vales. If you receive a gift, your basis is the same as the donor’s basis, so don’t toss those old records just because you’re the new owner of the assets.
- If you claim any other special tax breaks, a good rule of thumb is to keep your records for as long as the tax benefit runs plus three years.
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 in your filing cabinet, and quite possibly, your 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). Your scanned or electronic receipts must be as accurate as your paper records, and you must be able to index, store, preserve, retrieve, and reproduce the records if asked. In other words, you need to have your records organized and be able to produce them in a hard copy form if needed.
Wondering what you can safely toss? Consider:
- Duplicates of receipts.
- Records that are unrelated to deductions and credits not claimed. Those include medical receipts when you don’t claim the medical expenses deduction, and receipts from your charitable donations when you don’t claim the charitable deduction.
- Old tax returns. Some tax professionals recommend that you never throw out your old tax returns – even when the statute of limitations has already run – as proof that you’ve filed. I don’t think that’s necessary. I started working at age 14, and I don’t want to die with a filing cabinet full of 50+ years of tax returns, so I toss mine after the statute runs. Find your own level of comfort.
- Paycheck stubs. At the beginning of each new year, check your paycheck stubs against your prior 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 tax-related records. If the statute of limitations has run, you can generally destroy tax-related records (though keep in mind there may be other non-tax related reasons for holding onto some records, such as a paid-off mortgage statement).
When you’re ready to toss your old records, have a shredder handy. Don’t simply throw them into the recycling bin or trash can: 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.