We know. Those fat file folders of tax forms are stuffed into your cabinets– or cluttering up your hard drive — long after April’s tax payments have gone to various governments. That’s actually appropriate, to some extent. But sooner or later, many taxpayers are left wondering what to keep and what to toss, what to save and what to delete. When can we clean out some of this paperwork?
The short answer is: Not for at least three years after the due date, which typically is April 15. The Internal Revenue Service advises holding on to the tax forms plus any documents supporting them (W-2 slips, dividend statements, receipts for stock sales, etc.) that long. The federal agency can collect more tax and, taxpayers can amend their returns during that period.
But, as the Kiplinger Tax Letter suggests, don’t just send everything to the shredder after three years. There are important exceptions. The IRS offers these sweeping guidelines:
• Retain those returns for six years if you did not report some income and the amount totals more than 25 percent of the gross income that was declared.
• Hang on to records for seven years when claiming certain losses, such as worthless securities or bad debts.
• There is no limit for returns that were not filed at all or that involve fraud.
• Employers should keep employment and payroll tax records for at least four years after the due date for taxes.
• Keep health insurance coverages for all family members. They now are part of tax returns.
Some types of records also should linger for as long as decades because they verify important financial events. Real estate records are a good example. Homeowners will have to figure the original value plus costs of other additions (adjusted basis) when they sell their houses. Keep the records for at least three years after selling the property.
Ditto for records of other types of property, such as stock investments and traditional Individual Retirement Arrangements (IRAs), which both can involve tax liability. Keep details of inheritances of property to report in the tax year when they are sold; they are valued when received on the date of death of the donor.
Whether or not it’s required, filing away some tax records helps to paint a picture of your financial life, and that recordkeeping can be valuable by itself.
If you’re a client, EricJohn Ltd. also has kept your financial records in secure form electronically since 2009, owner Eric Buechler says. For more detailed information about recordkeeping, contact EricJohn Ltd. or check into IRS Publication 552 (Recordkeeping for Individuals).