How Long Do I Need to Keep Records?

Tax season is over! Whew! Of course, there are always extensions, but the main rush is over. During tax season, I’m often asked “How long do I need to keep copies of my tax returns?” The answer is, as is often the case with many tax questions, it depends.

In general, I recommend keeping your tax returns and any documents supporting income and deductions for 5-7 years. The IRS offers this guidance:

Period of Limitations that apply to income tax returns:

  1. Keep records for 3 years if situations (4), (5), and (6) below do not apply to you.
  2. Keep records for 3 years from the date you filed your original return or 2 years from the date you paid the tax, whichever is later, if you file a claim for credit or refund after you file your return.
  3. Keep records for 7 years if you file a claim for a loss from worthless securities or bad debt deduction.
  4. Keep records for 6 years if you do not report income that you should report, and it is more than 25% of the gross income shown on your return.
  5. Keep records indefinitely if you do not file a return.
  6. Keep records indefinitely if you file a fraudulent return.
  7. Keep employment tax records for at least 4 years after the date that the tax becomes due or is paid, whichever is later.

Before you go pitching all those older records, there are exceptions to the rule:

For stock and investments, make sure that the cost basis information on the brokerage statements is listed and is correct.  If you hold shares outside of a brokerage account, make sure you have the purchase information as well as year-end statements showing dividend reinvestments.  If there were mergers, or spinoffs, keep information detailing those items as well.

For real estate, keep the settlement statement when the property was purchased, as well as receipts or documents for any major improvements.  While there is an exclusion on the sale of a personal residence (which leads people to believe they no longer need to keep those records), there are several reasons to hang on to them:

Circumstances or tax law may change.  You may turn the home into a rental property, and accurate information will be needed to depreciate the property.

The property may appreciate and sell for more than the $500,000 (married filing joint) or $250,000 (single) exclusion amount and basis information is needed to reduce the gain to qualify for the exclusion.

You may gift or transfer the property to a child or other relative. If so, your basis becomes their basis, and this information will be needed for a gift tax return, as well as for the recipients’ records depending on how they use the property.

For items not related to tax returns, you may be able to destroy those items more quickly.

Items to keep for one year:

  • Investment Statements – Keep monthly statements for at least one year. Often firms will provide a Year-end statement showing all activity for the year upon request.  Before destroying, see the prior comments about basis information.
  • Bank statements.
  • Retirement plan statements ― Keep quarterly statements until you receive your year-end statement.
  • Home, auto and umbrella policies ― Keep until you get your new policy. For auto insurance, most states accept electronic versions of your insurance card, but it may also be smart to keep a printed version in your glove compartment.
  • The Federal Trade Commission suggests holding on to your paid medical bills for a year before tossing them—unless you have an unresolved insurance dispute, in which case you would retain the medical bills until the dispute is resolved. Medical bills are confusing, and having records on hand to dispute payments or errors is wise.

Items to keep for less than a year:

  • Receipts from restaurants, gas stations, grocery stores, department stores, utility bills, other debit/credit card receipts – Shred or delete after confirming the charge or verifying payment on your bank or credit card account. However, keep receipts for  any purchases that  pertain to:
    • Products under warranty
    • Your tax returns
    • Insurance claims

Fortunately, most banks, credit cards and online purchases have the ability to access those records online for at least one or two years.

When disposing of documents, make sure you are shredding them or destroying any confidential information.

There are some items that you should keep forever. These important papers include:

•Birth certificates
•Social Security cards
•Marriage certificates
•Adoption papers
•Divorce papers
•Death certificates
•Passports
•Wills and living wills
•Powers of attorney
•Legal filings
•Military records
•Retirement and pension plans
•Inheritance documents
•Beneficiary forms
•Car or other titles to assets
•Deeds to real estate

Filed under: Dollars & Sense, News
Profile photo of Penny Wasem, CPA, CFP, PFS, owner of Lifetime Financial Planning Solutions in Lancaster, Ohio.

By Penny Wasem, CPA, CFP, PFS

Penny L. Wasem is the owner of Lifetime Financial Planning Solutions, LLC. A summa cum laude graduate of Ohio University, Penny earned a Bachelor of Business Administration with focus in accounting and mathematics. She serves on the board of The Fairfield Medical Center Foundation, is a member of the Investment Committee of The Fairfield County Foundation and has been active on many non-profit boards in the community. Penny lives in Lancaster with her husband Eric Hubbard and is parent to Clark and Olivia Hubbard.