When we moved into our first house—an old Victorian twin in Philadelphia—the extra bedroom on the second floor quickly became a catch-all for boxes, papers, and books.
When it came time to convert that room to a nursery for my daughter, we were finally forced to unpack some of the boxes and get organized. When I mentioned to my neighbor that I found it all very stressful, she agreed, explaining that’s why they had never tackled the boxes in their basement from their initial move—in 1976.
While 1976 does feel a bit like overkill, it’s often the case that many of us hang on to far more paper than we need to. It can be scary tossing papers that you worry you might need in the future, especially when it comes to tax and financial records. Tax professionals like me often stress the importance of hanging onto tax-related receipts, but don’t fall into the trap of believing that you have to keep all of your tax and financial records forever.
It’s OK—and honestly, encouraged—to regularly sort through your records and toss those that are no longer important. Here are some tips to help you figure out which records to keep and how long to keep them.
Statute of Limitations
Hold onto 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, as outlined in section 6501.
That means if you file early, the statute would still run as of the due date.
For example, if you filed your 2020 tax return on March 1, 2021, you’ll need to keep your returns and records until May 17, 2024, since Tax Day was May 17, 2021. The opposite, however, is not true: If you file after Tax Day, including timely filing with an extension, the due date is three years from the date of filing.
There are a few exceptions to the three-year rule.
For example, amended returns are subject to the original statute of limitations, which means that the statute of limitations starts to run on the original due date.
Additionally, if you claim a credit or file for a refund of tax 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.
The IRS also assumes that you filed a complete and accurate return. If you don’t report all of the income that you should—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.
The same is true when you do not disclose income related to foreign financial assets worth more than $5,000 on your tax return. Again, in that case, you’ll want to keep those records for at least six years.
If you file a clearly fraudulent return—or if you don’t file a return at all—the statute of limitations never actually runs. In that event, you’ll want to hold onto your records forever.
What to Keep
In addition to your tax return, you’ll want to hold on to your supporting documentation during the statute of limitations period. That includes information from employers and vendors, like Forms W-2 and 1099. It also includes bills, credit cards, 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.
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 and titles, as well as any receipts for improvements or other adjustments to basis.
If you claim special deductions and 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.
For property like your home, other real estate, or stocks and bonds that will result in a taxable event at sale or disposition, you’ll want to keep records that support your related tax consequences— like capital gains—until the disposition of the property plus the statute of limitations (generally, three years).
So, if you bought a house in 2000, but sold it in 2020, you’ll want to keep your records through 2024: three years after the 2020 tax year.
If you claim any other special tax benefits, like 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.
Gifts and Inheritances
For most assets, supporting your cost basis is a simple matter of holding onto the original receipt.
However, if you receive property as the result of a gift or inheritance, you’ll want to keep records that support your basis in the transferred property. Normally, if you inherit property, your basis is the stepped-up value as of the date of death, so it’s a good idea to retain a copy of any filed inheritance or estate tax returns, or other official documents that memorialize that value.
If, however, you receive a gift, your basis is the same as the donor’s basis, which means you’ll want to keep the original owner’s documentation: Don’t toss those old records just because you’re the new owner of the assets.
Most of these rules apply to the IRS. It’s true that some state tax agencies observe the same three-year statute of limitations, but that isn’t always the case. Check your individual state’s rules before tossing anything out.
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 bank or mortgage company, or other institution, before tossing essential records.
Organizing, Preserving, and Tossing Records
Keep your records organized—I recommend arranging them by year—and store them in a safe place. If the IRS comes calling, you must be able to promptly produce legible records.
Consider scanning your records and storing them electronically. The IRS has accepted scanned receipts since 1997, a policy that was memorialized by Rev. Proc. 97–22. You have to be sure 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. As with paper records, you need to be able to timely produce them in a hard copy form if needed.
Finally, when it comes time to get rid of those old papers, don’t simply throw old tax returns and banking information in the trash. It’s best to shred records with sensitive data. If you don’t have a shredder at home, try a shredding service, usually available at shipping or office supply stores for a nominal fee. And that goes for more than just paper—you can generally shred or destroy plastics and electronic media, like DVDs and hard drives, safely, too.
**This is the third column in a series on taxpayers and tax professionals. You can find the rest of the series here:
- Your Tax Pro’s Just Not That Into You: Why You May Get Dropped
- Your How-To Guide to Finding the Right Tax Professional for You
This is a weekly column from Kelly Phillips Erb, the Taxgirl. Erb offers commentary on the latest in tax news, tax law, and tax policy. Look for Erb’s column every week from Bloomberg Tax and follow her on Twitter at @taxgirl.