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Piles of paper might drive you crazy, but it's important to understand how long to keep tax documents to protect yourself. If you are subjected to an audit or the IRS (Internal Revenue Service) discovers errors on your tax returns, you may need to return to your records to prove that what you claimed is correct or fix an error.
The length of time you must keep each document differs, as each document has a period of limitations you should adhere to.
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Keeping Personal and Business Financial Documents
You may need to hold onto personal and business financial documents for up to six years. Therefore, it is important to have a system that keeps track of your documents, whether you consider digital records or keep a filing cabinet in the basement. The key is that you have the documents should the IRS require them.
How Long to Keep Tax Returns Before Discarding
The IRS has a three-year rule for keeping tax returns. For example, the IRS has a three-year statute of limitations to assess unpaid or additional taxes. You also have three years from filing your tax return to file a claim for an unclaimed refund.
But here are the exceptions:
You should hold onto retirement documentation for at least seven years after you've used all the funds. The same is true of documentation for any claims of worthless securities or bad debt.
In addition, if you erroneously filed your taxes and omitted gross income, you must keep your tax records for six years. Finally, if you file a fraudulent return or don't file your taxes, the IRS doesn't have a statute of limitations in this case.
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How Long Should You Keep All Forms of Tax Records Before Discarding?
It's best to keep any records that coincide with your tax returns, such as W-2s, 1099s, and any other tax records, for as long as you keep the tax returns. This will provide supporting documentation should the IRS come back with questions or an audit.
How Long to Keep Bank Statements Before Discarding
It's best to hold onto bank statements for three to seven years. Consider what statute of limitations your tax returns follow, and keep your bank statements for at least that long. To err on the side of caution, consider keeping bank statements for at least six years. This ensures you've satisfied the longest IRS statute of limitation, except for filing a fraudulent tax return, which we never recommend.
How Long Should You Keep Utility Bills Before Discarding?
Unless you need proof of utility payments for business purposes, you don't have to hold onto them for long. After you pay the bill and ensure it posts, you can discard the bill, eliminating some of the paper clutter.
How Long Should You Keep Pay Stubs Before Discarding?
Keeping copies of your pay stubs for the entire calendar year is best. This allows you to compare them to your W-2 when it arrives to ensure their accuracy when you report income.
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How Long to Keep All Other Financial Related Documents Before Discarding
Consider keeping any other financial records for three to seven years if they coincide with your tax returns. However, if they don't have anything to do with your tax returns, keeping the records for the year is typically sufficient.
Tax Deductible Expense Documents
Consider keeping any documents you have to prove your tax-deductible expenses throughout the statute of limitations for your tax returns. This ensures you have adequate proof of what you filed if the IRS has any questions or concerns about your tax returns.
How Long Should You Keep Receipts Before Discarding?
If your receipts are tied to your tax return because you deducted the expense, keep them as long as your statute of limitations allows. If the expense doesn't affect your tax returns, you can eliminate them when the return or warranty period ends.
For example, if you bought a product with a manufacturer warranty or purchased extra protection, consider keeping the receipt as proof of purchase if you need to file a claim.
Retirement and Other Investment Documents
Keep retirement and other investment documents as long as your statute of limitations on your tax returns. This is important because most retirement accounts have tax benefits, and your other investments may have incurred tax liabilities or deductions.
How Long to Keep Retirement Statements Before Discarding
While it's important to keep your retirement documents as long as your statute of limitations, most people should keep them for as long as they have a balance and for an additional seven years after that date.
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How Long to Keep Estate and Inheritance Documents
Estate planning and inheritance documents are something you should keep forever. Don't discard them; keep them with important documents like birth certificates and Social Security cards.
Home and Property Documents
If you own a home or other property, you should keep the records for at least three years after you sell the property. This ensures there aren't any issues with how you claimed the property on your tax returns, such as the capital gains or losses you claimed.
How Long Should I Keep Mortgage Documents After Selling a Home?
Like property documents, keep your mortgage documents for three years after selling the property. This ensures the IRS has no issues with the returns you filed when you had the mortgage. The exception to this rule is paying the mortgage off well before selling the property. In that case, keep the documents for three years after paying the mortgage off in full.
The Consequences of Not Keeping Documents
While there isn't a specific penalty you'll pay if you don't keep your documents, you may pay penalties or be subject to the amount the IRS says you owe. You don't have any evidence to use to fight for your case without substantiating documentation.
Why Keeping Tax Returns for Many Years Is Important
The IRS can come back three to six years after you file your taxes with questions or concerns. If you don't have your tax returns, you're at their mercy and don't have much to say. You may pay them more than you anticipated in fines if you don't have proof of what you filed.
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Tips for Keeping Financial Documents Organized
The more organized your system is for keeping financial records, the better. When you're facing an audit or even a warning from the IRS, the last thing you want is to shuffle through shoeboxes of paperwork.
Instead, consider a tax filing system either with paper records or digital documents.
The key is to sort them by year and category with clear labels within each document. If you choose to scan your documents and keep a digital copy, make sure to encrypt the data and set a password to get into the documents to prevent anyone from hacking your information.
How to Properly Dispose of Tax and Financial Documents
When you're ready to dispose of your tax and financial documents, shred paper with a professional shredder and clear any electronic documents from your devices before giving them away.
Is the Process for Keeping Tax and Other Documents Different for 1099 vs. W2 Employees?
Whether you're an employee or a contractor paid via 1099, you must keep your employment tax records for the same amount of time. Make sure you've satisfied the IRS statute of limitations before destroying your documents to ensure you have the necessary proof should an error appear.
What Is the Period of Limitations According to the IRS?
For most people, the IRS statute of limitations is three years, but there are exceptions to the rule, making most people keep their tax records for six to seven years.
What Should I Do if I Lose My Tax or Other Important Financial Records?
If you lose your tax or other important financial records, see what you can do about getting another copy. For example, you can request a copy of your IRS transcripts from the IRS, and most financial institutions can replicate lost documents. Just be sure to allow enough time, as archived documents can take a while to produce.
The Bottom Line: How Long to Keep Tax Documents
Always err on the side of caution when deciding how long to keep tax documents. At the very least, keep them according to the three-year rule, but most people need them for at least six to seven years. Its always best to hang onto documents too long than face issues with the IRS.