How Long Should You Keep Tax and Financial Records?
What do you need to hang on to and for how long?
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How Long Should You Keep Tax and Financial Records?
When it comes to your tax and financial records, what do you need to hang on to and for how long? Here are some guidelines to help you keep what you need for the right length of time.
First off, you’ll want to store your records in an organized way in a safe place. A filing cabinet is an excellent choice. For more tips on how to organize your tax and financial paperwork, check out last week’s episode.
How Long Should You Keep Tax Returns?
When it comes to tax returns, the IRS has up to three years from the date you file to audit your return if it suspects accidental errors. You also have three years to file an amended return.
But it’s actually best to keep your tax records for seven years because the IRS can ask to see them at later points in special situations. If, for example, the IRS suspects you’ve under-reported your income by an amount that’s 25% or more of your reported income, they can ask to see your records up to six years later. And if you’ve written off a worthless stock, the IRS can ask to see your tax return and supporting documentation up to seven years later. So keep them for seven years to play it safe.
Here’s a link to IRS Publication 552, which states how long the IRS has to audit your return in different situations. You can find it at the bottom of the page.
Keep Supporting Documentation Too
Be sure to hang on to the supporting documentation you used to prepare your tax returns. If you get audited, you’ll want to be able to show where the numbers on your return came from. So keep your documentation related to income, expenses, investments, and home purchases or sales. Keeping the supporting documentation together with your tax return will make it easy to find what you need if you ever have to refer back to it.
Receipts for Home Improvement
When it comes to home improvements, keep the receipts for as long as you own your house. The cost of permanent improvements as well as your selling expenses are added to your original purchase price to determine your cost basis when you sell, which can sometimes reduce the amount of capital gains tax you’ll owe.
It’s also a good idea to keep your records from the purchase and sale of your house or rental property for six years after you sell it.
Retirement, Savings, and Brokerage Statements
When it comes to records showing nondeductible IRA contributions you’ve made, you’ll want to keep them indefinitely. When you begin making IRA withdrawals in retirement, you’ll have them in case you need to prove that you’ve already paid tax on the money.
Keep your monthly retirement and savings account statements throughout the year until you receive your year-end statement. If your year-end statement matches the monthly statements, you can get rid of the monthly statements and simply keep the year-end version.
Also keep your records of stock and mutual fund purchases until you sell because you’ll need them to calculate your capital gain or loss.
What Can You Toss?
Even though there’s quite a bit of financial paperwork that you should keep, you don’t have to become a pack rat. There are some things you can happily toss. You can get rid of your pay stubs each year after checking that they match what appears on your W-2. You can also purge credit card statements, utility bills, and phone bills after you’ve paid them x they don’t contain deductible expenses. When getting rid of financial papers you no longer need, shred them – it’s the safest way to go.
So here’s hoping that you always have what you need, when you need it!
As always, everyone’s situation is different, so be sure to consult a tax or financial advisor before making important financial decisions. This article is for educational purposes only and is not intended to be a substitute for seeking personalized, professional advice.Send your questions or comments to money@quickanddirtytips.comcreate new email.
Related Links: IRS Publication 552
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