In this news:
The rules for retaining tax records are pretty straightforward.
Some taxpayers like to hang on to every piece of tax-related paper, from receipts to returns, forever. Others do just the opposite: they shred and purge like nuts immediately. When it comes to tax records, which is better?
For tax purposes, you need to find a middle ground. And that middle ground is more precise than somewhere between "forever" and "immediately." While it's true that you want to keep essential 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 1099 but also credit card and other receipts, invoices, mileage logs, copies of checks, proofs of payment, and any other records that support income, deductions, credits, or tax breaks you reported or claimed on your return.
Statute Of Limitations
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 filing date 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 2024 tax return (the tax year ending December 31, 2024) begins to run on April 15, 2025. You'll want to keep those records until at least April 15, 2025.
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.
(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.)
There are some clear exceptions to the three-year rule. For example, 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 should keep those records for at least six years after filing. You may also consider getting another tax professional.
If you file a clearly fraudulent return or don't file a return, the statute of limitations never runs. That means there is no time limit on IRS action, and they can audit you anytime. 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.
And if you omit income over $5,000 related to one or more specified foreign financial assets, the statute of limitations is six years. Keep in mind that a failure to file an information form—like Form 8938, which applies to foreign assets—doesn't result in a pass under the three-year rule: If you fail to file or properly report an asset on an information form like Form 8938, the statute of limitations for the tax year is extended to three years following the time you provide the required information. The good news? If the failure is due to reasonable cause, the statute of limitations is extended only with regard to the item or items related to such failure and not for the entire tax return.
What To Keep
In addition to records showing that you filed, you'll want to keep supporting documentation like confirmation of charitable contributions or medical receipts (assuming you claimed those deductions).
If you make an adjustment on a tax return—for example, correcting a reporting error due to the new form 1099-K threshold—keep records to support the change. That would include the form that was issued, any related correspondence if you contacted the issuer, and, importantly, information about the underlying transactions.
You may also need to keep documentation to support transactions that will be reported on future tax returns. For example, you may want to consider retaining your IRA records—including Roth contributions—until you withdraw the money from your account.
If you buy capital assets like stocks, bonds, or real estate, you'll want to keep records that support the basis (typically your purchase price plus any adjustments) for as long as you own the property, plus three years. Don't forget that capital assets include bitcoin and other cryptocurrencies. Keep records of any crypto that you buy, sell, mine, or otherwise transact, since in some cases, there may be no third-party reporting.
If you claim depreciation, amortization, or depletion deductions for certain assets, including 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 usual. For example, if you file a claim for a loss from worthless securities or a bad debt deduction, you should keep those records for seven years. And if you have household employees, like a nanny or housekeeper, keep those employment tax records for at least four years after payroll taxes become due or are paid, whichever is later. This should include forms W-2 and W-4 and 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 values. 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.
Storing Tax Records
Keep your records organized—I recommend arranging them by year—and store them in a safe place. A filing cabinet will do, but it should be fire and water-safe. And consider where you’re storing records—keeping them in a basement or attic with a moisture problem isn’t ideal, but storing them off premises may also pose a challenge. If the IRS comes calling, you'll want to be able to produce legible records in a timely manner.
If you store files in a filing cabinet, keep it organized.
To save space in your filing cabinet—and quite possibly, your sanity—you can scan and store your records electronically. The IRS has accepted scanned receipts since 1997, a policy memorialized by Rev. Proc. 97–22. 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 required.
What To Toss
You don't have to keep everything. Wondering what you can safely toss? Consider throwing away:
Duplicates of receipts or those records that can be easily reproduced. A good tip? Annotate your deductions on your credit card statement with the necessary information (or scan and annotate your receipts)—that way, you can chuck your individual 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. I started working at age 14, and I don't want to die with a filing cabinet full of tax returns, so I toss mine after the statute runs. Plus, you can typically verify receipt by checking your IRS online account. That said, if tossing the returns out makes you nervous, consider scanning them and getting rid of the paper.
Paycheck stubs. You should check your year-end paycheck stub to make sure that it matches your other records, including your form W-2 and your annual Social Security statement, and properly reflects your income, pre-tax deductions, employee benefits, and the like. But you don't need to save the stubs once you've confirmed that they're correct. Additionally, if your employer uses a payroll company, you can typically access that information online.
Old tax-related records. If the statute of limitations has run, you can generally destroy tax-related records, like receipts (though keep in mind there may be other non-tax-related reasons for holding onto some records, such as a paid-off mortgage statement or student loan records that you're still paying off).
How To Get Rid Of Records
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. I have a shredder in my home office, but if you don't own one, look around. Some office supply stores and shredding companies will shred documents for a fee (some will even come to your house or office). There are also free services available—a neighboring township, for example, hosts a shredding event several times a year (and for the skeptics, the shredding company will let you watch the shredding take place on their TV monitor in the truck).
The same care should be taken with electronic records. Don't simply toss old laptops, hard drives, or phones into the trash. Wipe them clean (or, better yet, have a professional do it for you). E-shredding or electronic shredding services are also available in most areas.
The bottom line: Technology has made it easier to store tax records and offload paper, but that doesn’t mean that you should be reckless. Be thoughtful about what records to keep and what records to toss—and be just as thoughtful about how to do it. Have questions about a specific record? Ask your tax professional what they recommend.
ForbesWhen Is A Loss A Tax Loss? As Markets Tumble, Here’s What To Know About Capital Gains And LossesBy Kelly Phillips Erb
.png)
