Tax season is one of the most stressful times of the year. Between paperwork, record keeping, and filing before the deadline, you can easily feel overwhelmed. Taxes can be complicated and figuring out how long you need to keep your records, returns, forms, canceled checks, receipts, and other tax-related items can also be confusing.
The last thing you want to do is throw out evidence related to your tax return only to be audited by the Internal Revenue Service (IRS). It’s important to organize the tax-related documents you have into categories and find out how long you’re required to keep each category of documents.
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Hold on to your paycheck stubs throughout the year so you can compare them to the W-2 you receive from your employer. If the totals match and you don’t have any disputes to address, you can generally throw out your paycheck stubs.
You should also keep your monthly brokerage statements and compare them to your year-end statements and 1099 forms. Once you’ve compared these figures and agree with what you’ve received from your financial institutions, you can generally throw out these statements.
If you file a claim for a credit or refund, you’ll need to hold on to your records for at least three years from the date you originally filed your return or two years from the date you paid the tax. The records you keep should include any information about your income, deductions, or credits. Keep copies of your W-2s, 1099s, 1098s, or any other forms you used to calculate your refund due or taxes owed to the IRS.
It’s also important to keep your canceled checks and receipts for donations for at least three years from the date you claimed them. Hold on to records that show eligible withdrawals from your health savings account or 529 college savings plans. You should also keep records that show you contributed to tax-deductible retirement plans, such as a traditional IRA, for at least three years.
If you didn’t report at least 25% of the income that you should have reported, the IRS has up to six years to initiate an audit. Therefore, you’ll need to keep 1099s that show your income, receipts, or other business expense records for at least six years to be safe.
You have seven years to claim bad debt deductions or losses from securities that didn’t perform. Hold on to any records or reports from these investments for at least seven years so you can confidently write off these losses and prove them to the IRS, if needed.
You have up to 10 years to correct a previously claimed foreign tax credit. If you filed your taxes with a foreign government, you may have been able to choose whether you wanted a deduction or credit. You also have up to 10 years to change your mind by filing an amended tax return. Keep your foreign tax filing records and any documents related to the returns you filed with a foreign government, just in case you want to amend it within this timeframe.
In some incidences, it may be beneficial to hold on to your tax-related documents indefinitely. If you committed tax fraud in any instance, the IRS doesn’t have to follow a statute of limitations and you can be audited at any time. If your paperwork is still available, the auditing process can go more smoothly and may help you plead your case.
If you didn’t file a tax return, you should also hold on to any financial or tax-related documents you have for the year you skipped. The IRS may question why you skipped a year of filing taxes, and having proof, such as not making an income, can help you prove you didn’t need to file for the year.
Investments and Properties
If you sell investments or properties, you’ll need to hold on to related records for at least three years after the sale. These show that you have already paid taxes on your investment contributions and don’t owe them again. It’s especially important to keep property records for at least three years after the sale if the property was inherited or gifted. You may need to prove the market value of the property at the time of your sale to justify the taxes you paid on your profit.
When you buy a new property, you’ll need to hold on to records from the old property and the new property. The IRS requires you to keep these records until the period of limitations expires for the year in which you dispose of the new property.
Organizing Tax Records
While the IRS sets stipulations on how long you need to keep your tax records, the department has no guidelines on how you organize these documents. However, keeping them in order can make it easier to find records when you need them. You can organize these documents through:
- A paper filing system: You can use a filing cabinet drawer or folders on a bookshelf to organize your tax documents. Separate them by year so you can reference each year. Within these year folders, you can further separate your documents by subject, such as “Investments” or “Income.”
- Electronic record keeping: If you prefer not to keep the actual paperwork, you can scan these documents and use an electronic record keeping system. You can also categorize your documents by year and subject to keep them organized on your computer. Be sure you backup your electronic records and keep them saved on a hard drive or cloud so you don’t lose them if your computer crashes.
What Should I Do With My Tax Records After I No Longer Need Them?
Confirm that you can get rid of certain tax-related documents before you destroy them. Not only should you review the IRS guidelines on how long to keep these records but also other companies’ guidelines. For example, your insurance or credit card company may require that you hold on to tax documents for longer than the IRS requires.
Dispose of the documents you no longer need carefully since they may contain sensitive and personal information. Shred these documents before throwing them away. You can also hire a professional document shredding company to pick up your documents, shred them, and dispose of them.
While keeping your tax-related documents can make your life feel more complicated, it’s important to hold on to these records in case the IRS requests them. Keep them organized so you can easily reference them when needed. If you know you don’t need these documents any more, dispose of them responsibly so your personal information isn’t compromised.
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