Now that tax season is over, you can finally address the pile of tax records and financial documents cluttering your desk, bookshelf or kitchen table. Don’t get too excited and toss them in the trash can. It’s important to save copies of your tax returns and documents used to prepare them. For how long? We’re glad you asked.
The rule of three: Generally, store prior year tax returns, W-2s, 1099s, receipts and anything else used to prepare your return for three years from the date you filed your original return, according to the period of limitations advised by the IRS. If you filed your 2016 tax return on April 18, 2017, you should keep it until April 18, 2020. During this period, you can amend your tax return to claim a credit or refund or the IRS can assess additional tax. If you do this, keep records for three years from the date you filed the original return or two years from the date you paid the tax, whichever is later.
Exceptions to the rule: In some cases, you need to keep tax documents for a longer period. Save documents for seven years if you file a claim for a loss from worthless securities or bad debt deductions. Keep records for six years if you do not report income that you should report and it is more than 25 percent of the gross income shown on your return.
Forever is better: If you have the storage space, consider keeping your filed tax returns as long as you can. They help in preparing future tax returns. Property records are also helpful to calculate depreciation, amortization or depletion deduction and to determine the gain or loss when you sell or dispose of the property. The IRS advises keeping records indefinitely if you do not file a return or if you file a fraudulent return.
Store them or shred them: For tax records you need to keep, make sure you take precautions to keep them safe and secure. Have strong security software if you save them electronically, or find a place in your home or office that is out of sight. When it’s time to dispose of documents, don’t toss them in the trash can. Ask yourself, “Do I care if anyone sees this?” If the answer is anything but “no,” then shred it.