Q: Now that I’ve filed my income tax return, I’m going to clean out my old files. What tax records can I toss, and what do I need to keep? How long do I need to keep them?
A: The IRS generally has three years after the due date of your return (or the date you file it, if later) to initiate an audit, so you can toss many of your tax records after that time has passed. But you should keep some records even longer, and it’s a good idea to hold on to your tax returns indefinitely.
Here’s how long you need to keep your tax records—and when you can send them to the shredder.
After One Year
You can shred pay stubs after you’ve checked them against your W-2s, and you can generally shred monthly brokerage statements after they match up with your year-end statements and 1099s.
After Three Years
Keep the following documents with your tax files for at least three years after the tax-filing deadline:
- Form W-2s reporting income
- Form 1099s showing capital gains, dividends and interest on investments
- Form 1098 if you deducted mortgage interest
- Canceled checks and receipts for charitable contributions
- Records showing eligible expenses for withdrawals from health savings accounts and 529 college-savings plans
- Records showing contributions to a tax-deductible retirement-savings plan, such as a traditional IRA
After Six Years
The IRS has up to six years to initiate an audit if you’ve neglected to report at least 25% of your income. For self-employed people, who may receive multiple 1099s reporting business income from a variety of sources, it can be easy to miss one or overlook reporting some income. To be on the safe side, they should generally keep their 1099s, their receipts and other records of business expenses for at least six years.
Special Situations
You’ll need to keep some records for as long as you hold the investments, plus another three years after you sell.
For example, keep records of contributions to a nondeductible IRA for three years after the account is depleted. You’ll need these records to show that you already paid taxes on the contributions and shouldn’t be taxed on them again when the money is withdrawn.
Keep investing records showing purchases in a taxable account (such as transaction records for stock, bond, mutual fund and other investment purchases) for up to three years after you sell the investments. You’ll need to report the purchase date and price when you file your taxes for the year they are sold to establish your cost basis, which will determine your taxable gains or loss when you sell the investment. Brokers must report the cost basis of stock purchased in 2011 or later, and of mutual funds and exchange-traded funds purchased in 2012 or later. But it helps to maintain your own records in case you switch brokers. (If you inherit stocks or funds, keep records of the value on the day the original owner died to help calculate the basis when you sell the investment.)
Keep home-purchase documents and receipts for home improvements for three years after you’ve sold the home. Most people don’t have to pay taxes on home-sale profits—singles can exclude up to $250,000 in gains and joint filers can exclude up to $500,000 if they’ve lived in the house for two of the five years prior to the sale. But if you sell the house before then or if your gains are larger, then you’ll need to have your home-purchase records to establish your basis. You can add the cost of significant home improvements to the basis, which will help reduce your tax liability. See IRS Publication 523, Selling Your Home, for more details.
For further information about how long to keep tax records, see the IRS’s Recordkeeping fact sheet.
Source: Kiplinger.com
