When it comes to managing personal finances, few topics cause as much confusion as whether to keep or discard tax records. While no one wants to be buried under piles of paperwork, throwing away important documents too soon can lead to major headaches if the IRS comes calling. So, how long should you actually hang on to your tax records, and when is it safe to let them go?
Why It’s Important to Keep Tax Records
Tax records serve as proof of the information you reported on your tax returns. They can support your claims for income, deductions, credits, and other items. If you’re ever audited by the IRS or need to amend a past return, having your records easily accessible will save you significant stress and possibly money.
Additionally, tax records are often required for non-IRS purposes too, such as applying for a mortgage, financial aid, or small business loans.
How Long Should You Keep Tax Records
The answer depends largely on your situation. In most cases, the IRS advises that you keep tax records for three years from the date you filed your return. This is the typical statute of limitations for an audit.
If you underreported your income by more than 25%, the IRS can audit you up to six years after you file. On the other hand, keep records for seven years if you claim a loss from worthless securities or bad debt.
If you did not file a return or filed a fraudulent one, keep your records indefinitely because the statute of limitations never runs out. Given these scenarios, deciding to keep or discard tax records isn’t always simple.
Which Documents Should You Keep?
When considering what to hold on to, focus on records that support:
- Income like W-2s, 1099s, and bank statements
- Income (W-2s, 1099s, bank statements)
- Deductions (charitable donation receipts, medical bills)
- Homeownership (closing statements, mortgage records)
- Investments (purchase and sales records)
- Retirement accounts (IRA contribution documents)
For business owners who are wondering whether to keep or discard tax returns should retain receipts, invoices, mileage logs, and client contracts. These documents are critical for businesses and freelancers.
When It’s Safe to Discard Tax Documents
There are a few ways to gauge whether to keep or discard tax records. For example, if the application period has passed and you’re in the clear, you can safely get rid of your records. However, don’t just throw them in the trash. Instead, always shred documents to protect your identity and financial information.
Digital storage is another smart option. Scanning your tax records and saving them securely online. Or use an encrypted drive to help you declutter without risking important information.
Conclusion
When deciding whether to keep or discard tax records, it’s better to err on the side of caution. Holding on to your documents a bit longer than necessary is usually safer than getting rid of them too soon. A well-organized filing system can make this easier and give you peace of mind should you ever need to access your tax history quickly.
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