The tax man cometh. It’s that time of year when you frantically sift and organize documents so you can file your tax return in time for the April 15th deadline. Some people choose to keep as many documents as possible, going back decades. However, there are many documents you can throw away, and that should be the goal if you want filing to become less stressful down the road. Here is a general outline of what you should keep, and for how long:
Keep your state and federal tax returns, along with related statements and receipts, for three years. If the IRS decides to perform an audit, they have the right to review tax returns during a period known as a “period of limitations,” which is usually the past 3 years from when you filed your most recent returns. So, you should keep your April 2009 returns until April 2013.
If you might have under-reported income by 25% or more, you’ll need to keep tax returns from 6 years before when you filed your last returns. As a general rule, it’s a good idea to keep records for years that contain unusual transactions during that 6-year period, including certain sales or donations of property. Also, irregular income like stock option exercises fall under this category. Keep a 2006 tax return until 2013 if it includes this kind of information.
Keep tax returns and documents that include a claim for deducting worthless securities for 7 years.
You should keep records of the cost of assets that can be sold or transferred for the entire life of the asset. Keep all documents associated with the purchase of a home or other real estate. Make sure to keep documents associated with the upkeep or improvements for your home and property as well. If you have done a refinancing, keep the mortgage note and the HUD-1 Settlement Statement. The statement includes interest and points paid that can be deductible.
Another rule to remember is that the IRS has an unlimited period of limitations to request information for years when you did not file a tax return or to audit returns when there is suspicion of fraud.
Something that’s helped me is that I have kept a file box that contains categories of tax-related information. I file documents as they come throughout the year, and it’s helped make this year’s tax return much less stressful. Finally, keep a back-up copy of financial records on your computer.