Knowing what information to keep and how long to keep it can help you organize your taxes and probably save space in a closet or file cabinet.
The Internal Revenue Service (IRS) says (in Publication 17) that you must keep records so you can prepare a complete and accurate income tax return. They go on to indicate that you must keep your records for as long as they are important to the federal income tax law.
To put this into perspective, remember that the IRS generally has three years from the date you file your return to start an audit. If the return does not report all your income, the IRS can start an audit within six years, and there is no statute of limitation for fraudulent returns.
With all that said and our tendency to keep more than we need, here are some general guidelines that may be helpful:
- Keep all the records you need to substantiate items in your return for three years. This means all the W-2 forms, the 1099 forms, and other receipts to document income reported and deductions claimed.
- For investment transactions, you need to be able to prove your basis in the investment in the year you sell it. This means keeping purchase confirmations until you sell the security and then for the three years after that. Another way to handle this is just to keep all statements showing transactions from the brokerage firm or mutual fund company.
- For real estate transactions, including your home, you need to be able to substantiate your original cost and any improvements made during your ownership. Once you sell the real estate, the three-year rule applies. For the sale of your home, if you had deferred the recognition of a gain on a prior home before May 7, 1997, you need to be able to take that deferred gain into account and document the prior home’s cost and improvements.
- You should probably keep copies of your tax returns forever. The IRS can provide copies for a charge, but having your own copies makes it easier to refer to them if needed.
- You should keep copies of your W-2 Forms (wage information) until you start receiving Social Security benefits. This can enable you to correct any inaccurate information they may have and protect your benefits.
- And finally, when in doubt about a certain item, it probably makes sense to keep it, at least for a couple of years.