How Long Should You Keep Your Tax Records?

Two of the most frequent questions that all taxpayers ask are: “How long must I keep my tax records?” and “Should I shred my records or can I just throw them out?

The quick answers: according to the IRS, individual taxpayers should keep returns for three to seven years, and yes, you should shred the old ones.

How Long Should You Keep Your Tax Records?

Generally, you must keep records that support an item of income, deduction or credit shown on your tax return until the period of limitations for that year’s tax return runs out. The period of limitations is the period in which you can amend your tax return to claim a credit or refund, or the IRS can assess additional tax.

Holding on to your old tax records can work out in your favor.  Individual tax filers can amend a return using Form 1040X within three years of its original filing date, or within two years of the date you paid taxes for that return, whichever is later. So, if you find out that you failed to claim a credit, a deduction or overstated your income, keeping all your tax records will surely help you file an amended return and claim a refund.

The IRS advises you to keep your old tax returns and records even longer in the following situations:

• You failed to report income for a given year, and that amount exceeds 25 percent of the gross income shown on your return.
• You filed a fraudulent return -- a willful act done with the intent to defraud the IRS. Using a false Social Security number or keeping two sets of financial books are examples of tax fraud.
• You didn't file a return for a given tax year, in which case you should keep your records indefinitely

What sort of tax records should you keep?

Along with copies of your actual returns, make sure to hold on to credit card bills, bank statements, receipts, mortgage interest statements, alimony paid, gambling losses, statements from charities, closing statements on real estate transactions, insurance records, property tax assessments, annual 401K/IRA statements and 1099 forms or other records of outside income. If you use your vehicle for business, hang on to your mileage log for a minimum of three years. And if you're self-employed, keep all documents pertaining to business activities and expenses so you can support your claims in case you get audited. If you claimed a loss on a “worthless security” or a deduction for a bad debt, then you need to keep your tax records for seven years.

Even after the statute of limitation passes and you get rid of supporting documentation, keep a copy of each year’s tax return that you file. This includes not just the 1040 itself, but also any associated schedules that you sent to the IRS that year. These often are needed when you apply for a loan or other financial assistance, such as money for college.

How to keep your records

The law doesn’t require any special record-keeping system for taxpayers. Converting your tax and other key financial records to an electronic format can save you a lot of physical space. You can store it on flash drives that you keep in a safe or safety deposit box, or store your tax information online.

What is the Best Way to Dispose of Tax Records?

If you are going to get rid of tax documents, be sure to do so carefully. Make sure to shred all your unwanted tax documents to prevent any sort of identity theft.