Wondering How Long to Keep Your Tax Records? | Here’s the Answer
Despite the digital revolution, it’s still important to hang on to hard copy tax documents for your own records. Even though computers and the cloud allow you tremendous savings on time, costs and space, avoid stress by devoting a certain amount of physical space for your physical documents that prove income and other financial information.
But there are different timelines for different types of taxes and income scenarios. This guide clarifies how long to keep your tax returns.
Why Saving Financial Documentation Matters
How long to keep tax returns depends on when the period of limitations expires.
The period of limitations:
This period of limitations is the amount of time you can amend your tax return for a credit or refund. This is also how long the IRS will take to determine if you need to pay additional taxes.
In some cases, it’s important to keep copies of your filed tax returns indefinitely. Generally, 3-7 years is a safe amount of time to hang on to these documents.
Here are some of the variables that affect how long you should save tax documents:
- property issues such as depreciation, amortization or depletion deduction
- issues regarding hard copy receipts and bank statements
- when a financial institution requires proof of income from W-2s and 1099s
- if the IRS audits you
- falling into debt and dealing with creditors
- investment records, particularly for substantial losses
- when you are a victim of tax identity theft
Holding on to your tax records can help resolve tax audits:
Nobody likes dealing with audits, tax theft or financial problems, but these situations can happen to anyone.
Some people get letters from the IRS asking to simply clarify information, so keeping these documents in a safe place will speed up the process.
How long do I need to keep tax records if I haven’t paid my taxes:
How long are you required to keep tax returns if you don’t report your full income as an individual?
You should keep your tax information for at least 6 years if for some reason you did not report your full income. This is especially true if the unreported income exceeds 25% of your gross income that you did not declare.
Also, if you did not file at all or if you are accused of filing a fraudulent return, you should keep your tax information indefinitely.
But for record-keeping purposes:
If none of these scenarios apply then you only need to retain the information for about 3 years.
However, if you plan to claim a tax credit after filing, you should keep them at least 2 years after you paid the initial tax.
Complex sources of income and property are also factors:
Your decision on how long to keep personal tax records also partly depends on how complex your income is.
If you invest in stocks and file a loss, it’s wiser to save brokerage account statements for at least 7 years. Keep employment tax records for about 4 years.
As a homeowner, you should hang on to all real estate paperwork throughout the period you own the property plus
How Long to Keep Business Tax Records
Deciding how long to keep business tax records is even more complex and depends if it’s a small or large operation.
The IRS defines a small business as having assets worth $10 million or less, whereas a large company has greater than $10 million in assets. Save corporate records such as meeting minutes and stock ledgers permanently.
Since large businesses are more likely to face litigation than small entities, it’s best to keep financial records for as long as possible.
Not all tax records are of equal importance:
But not all documentation needs to be saved for a lengthy amount of time.
- Payroll tax records that include wages, pension payments and tax deposits typically only need to be saved for 4 years after the due date.
- No need to keep records or logs of employee names, addresses, and social security numbers, along with wages and taxes, for longs periods of time.
- Also, save canceled checks, bank statements and credit card statements for about 7 years. However, if they support tax documents, keep them for a longer time frame.
Exceptions for how long to keep business tax returns:
Business tax returns, in general, should be saved for at least 3 years. However, if the IRS believes your return includes errors, then keep them for at least 6 years.
Lawyers and accountants often recommend keeping original business documents for 7 years in case of an audit or lawsuit.
How to Dispose of Tax Documents
While it’s usually a good idea to keep all your tax information for as long as you can, not everyone has space. Also, if you rent a small studio apartment or lack office space, it’s better to de-clutter your documents.
Consult a financial advisor or tax attorney who can help you clarify what’s best for your specific situation. If you decide to
Tax returns are confidential information, so shredding them ensures no one will see them.
Don’t assume that
Digital Record Keeping
Digital record keeping is just as important today as hanging on to physical documents.
According to the IRS, if you e-filed their tax return, you are entitled to paper copies. The IRS can provide free copies for the previous 3 tax years. However, it will only release tax returns and not the records from financial institutions or proof of income documents.
Also, be sure to back-up digital copies of your tax documents.
How long do you need to keep tax records? It depends on the circumstances and the different components of the tax system. Moreover, with the recent tax changes better keep everything on hand.
If you save all your returns and never discard them, you’ll be well prepared for any issues that come up with the IRS or financial entities. Contact us here at Locustax to learn more information about how long to keep income tax records.