If you are like me and don’t like to clutter your house with old papers and items that you no longer need, you might be wondering when is it safe to shred your old tax returns?
The best idea is to hold on to your tax returns indefinitely. With today’s technology you can scan in your old tax returns and keep them in a digital format without the need to have boxes filled with papers. If you are not fond of that idea or if you do not have a scanner or don’t know how to transfer your tax returns to a digital format, follow these guidelines on how long to keep your records.
If you do not file tax returns, you should keep your tax records indefinitely. Same applies if you have filed a fraudulent tax return.
The period of limitations is the period in which you can amend your tax return, or the IRS can access additional tax. In general, it is three years from the tax return due date, or from the date when it was filed, whichever is later. The three-year period will apply to most of your tax returns.
You must keep items that support your income such as W-2, 1099s (interest income, capital gains, dividends) until the period of limitations for that tax return runs out. Same applies to documents supporting deductions such as form 1098 (mortgage interest deduction), withdrawals from HSA accounts to pay eligible medical expenses, withdrawals from 529 accounts for eligible education expenses, and charitable deductions (cancelled checks and receipts). If you purchased a home, you need to keep home purchase documents and receipts for all home improvements for 3 years after the home is sold.
There are number of exceptions to this three-year rule:
- If you underreported your income by at least 25% keep records for six years
- Six-year rule also applies to receipts for business income and expenses if
you are self-employed.
- If you have filed a claim for a loss from worthless securities or bad debt deduction, you should keep those records for seven years.
- Save any records related to foreign taxes paid for at least 10 years.
It is very important to hold on to older investment and property records. If you bought investments such as stocks, bonds, mutual funds, exchange traded funds in a taxable account, make sure you have either a confirmation or a statement reflecting purchase price and date. You will have to retain these records for three years after you sold them. If you inherited any of above-mentioned investments, keep the value on the day the original owner died since you will need it to calculate your capital gain or loss when those investments are sold. If you received a property as a gift, you should know not only the donor’s adjusted basis and the purchase date, but the fair market value of the property on the date of the gift was received.
Before you put your files through a shredder, please check your state’s record retention recommendations as well since they might be different from the IRS requirements.
So for most tax returns three year rule will apply, but make sure you check with your financial planner or accountant to see if any of the exceptions would require you to hold on to your records for a longer period of time.