How Long Should You Keep Tax Information?

As an individual or small business owner, it’s crucial to keep track of all tax-related documentation. However, it’s challenging to determine for how long those records should be maintained. In this guide, we’ll uncover the ideal duration to keep tax information, the importance of record-keeping, and how to securely store tax documents.

Why Keep Tax Records?

Firstly, it’s required by law to retain accurate and complete tax records. The Internal Revenue Service (IRS) recommends keeping records to support the items on a tax return for at least three years from the filing date. However, some records should be retained indefinitely, such as employment tax records.

Additionally, keeping tax records can provide peace of mind and simplify tax preparation. In case of an audit, having complete documentation can reduce stress and support your tax return, potentially saving you time and money.

How Long Should You Keep Tax Documents?

The duration for maintaining tax records varies according to the nature of the document. Below are the guidelines for how long to keep specific tax-related records:

• Income Tax Returns: The IRS recommends keeping income tax returns for at least seven years. How long the IRS has to conduct an audit varies depending on specific situations. Typically, the IRS has three years from the filing deadline to initiate an audit. If a return understates gross income by more than 25%, the IRS has up to six years to audit. Taxpayers should hold onto filed state tax returns to keep uniformity in storage commitments.
• Proof of Income: It’s wise to keep any documentation proving income, such as W-2s, 1099s, and records of any other taxable compensation, for at least seven years.
• Deductions: Hold onto records supporting deductions for at least seven years, including receipts, canceled checks and statements for medical and dental expenses, charitable donations, mortgage interest, and business expenses.
• Investments: Retain records of purchases, sales, and exchanges of stocks, bonds, and other investments for at least seven years after selling. This documentation can help calculate the basis of a property and any capital gains or losses.
• Real Estate: Keep records related to real estate holdings, including deeds, purchase and sales records, and records of home improvements and real estate taxes for at least seven years after selling.
• Employment Taxes: Income, social security, and Medicare tax withholding records must be retained for a minimum of four years after the due date or payment date. Unemployment tax records should be kept for at least four years after filing the related tax return and FUTA taxes
• Retirement Accounts: Save records of contributions to retirement accounts, including Traditional and Roth IRAs, for at least seven years. These records are essential to calculate the basis of a retirement account and if contributions were excessive.

How to Store Tax Documents

It’s best to keep all tax-related documentation organized and in a secure place. Tax documents contain crucial personal information, such as social security numbers and income statements, making them attractive to identity thieves.

A few tips on how to store tax documents securely:

• Digitize paper documents with a scanner, taking note to back up documents on an external hard drive or cloud-based storage service.
• Store paper documents in a fireproof safe or file cabinet with a lock.
• Destroy digital documents once their retention time is over securely.
• Work with a reputable accountant or tax preparation service that can securely store records on your behalf.
• Consider staying knowledgeable on the current laws and regulations regarding document retention.

The Bottom Line

If you are unsure how long to keep a particular tax-related document, consult with an accountant, tax preparer, or financial institution. Remember, it’s better to store records for too long than not enough. Keeping accurate and complete documentation allows you to protect yourself from the threat of an audit and support your tax returns.

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