Tax Strategies & Credits

How Long Do You Need to Store Your Tax Records

How Long Do You Need to Store Your Tax Records

If you’ve taken care of paying your 2016 taxes, you may be contemplating throwing away that enormous stack of papers that you needed when you filed. Then again, you may think that you have to keep them, but aren’t sure about the length of time that’s required.  The rules on maintaining documentation may seem complicated, but the truth is that if you understand the justification for keeping your records, you will be better able to judge what to keep and what you can toss.

The IRS Regulations

The two most common motivations for keeping old paperwork are for the benefit of an outside agency – like the Internal Revenue Service or your state division of taxation – or for your own purposes. The top reason why you would need your records for yourself are for when you’re trying to figure out your tax basis when the time comes to sell capital assets.  The more information you have about what you spent on an asset, and the exact date that you purchased it, the more accurate you can be when determining your tax liability.

As far as the laws are concerned, you are required to keep your paperwork for no less than three years from the time your tax return was due or filed. This means that the clock won’t start running until you have sent in your return, so for the purpose of keeping your records, the due date is not as important as the date you filed. The maintenance rules apply to whichever is later.

The reason that you have to maintain your paperwork for such an extended period after filing your return is for the purpose of allowing the agency involved to determine whether you have paid appropriate taxes or whether you owe more. Some states have different requirements than those of the IRS, so it is a good idea to check what your own state’s requirements are, as well as to remember that the federal agency can add an additional three years if you have omitted more than 25 percent of your gross income when you reported your taxes. It is also important to note that there is no limit to how long you have to produce paperwork if you have filed a fraudulent or false return.

Assuming that there has been no fraud and that you have reported gross income within 25 percent of what is true, you can throw away your paperwork three years after you file. Again, if your state requires that you keep your documentation longer, you may need to add another year to that three-year rule.

How to Determine When You Can Throw Away Your Financial Papers

If you filed your 2013 tax return prior to the federal government due date of April 15, 2014, then the “later” date is the tax return’s due date, and you can discard your papers on April 17, 2014. If, however, you don’t file your taxes until a month later, on May 15, 2014, then you can’t throw away your papers until May 15, 2017. If your state requires it, then you may need to hold onto your papers for an additional year. One important exception to this rule, no matter where you live: if the three year anniversary of the “later” date falls on a holiday, a Saturday or a Sunday you do need to hold onto the papers for an additional couple of days, until the next business day.

Reasons to Hold onto Your Records

Although it can be tempting to do some spring cleaning and toss papers that you don’t feel a need to retain, throwing everything away can lead to unnecessary complications and challenges when the time comes to sell off capital assets. This is because the paperwork that you used to complete your annual tax return is the same resource that you need to establish your tax basis. The best way to address this problem is to maintain records of capital asset purchases separate and apart from the documentation that is not associated with these acquisitions. That way you can toss what you don’t need but hold onto what you will need at a later date. The papers that you should maintain include:

  • Records of all stock purchases and statements regarding mutual funds and stocks: these should be kept for a minimum of four years after you sell the stock in order to document any profit or loss that you have reported, or any reinvestment of dividends into the purchase of additional stock or funds that may change your tax basis. Whether you sell this type of investment for a profit or a loss, you will need to be able to show it – and in the case of a loss you may be able to carry over large losses that exceed the annual loss deduction amount ($3,000 for married or $1,500 if married filing separate) for several years. 
  • Receipts and records of expenses for home improvements, real estate (whether for home, investment, rental or business), any improvements made to those properties: these records need to be kept a minimum of four years after you no longer own the property. These records are important because you will want to do everything you can to maximize the home gain exclusion ($250,000 for single filers, $500,000 for joint filers) that is available when you sell a property. Though many people assume that this exclusion will cover any appreciation that has been realized on their property, there are times when it is not enough. Keeping meticulous records of improvements that have been made can offset these gains and help you avoid having to pay unnecessary taxes. 
  • Businesses that report net operating losses need to maintain all of their documentation proving their loss for a minimum of four years after the last return against which losses were deducted.

Can I Dispose of My Old Tax Returns?

Though there is no legal requirement that you keep a copy of your old tax returns, it is usually a good idea to do so – especially if you are maintaining old documents that are associated with them. If your tax returns are particularly voluminous, digitizing them is a good way to save space but still keep a copy handy.

Keeping accurate and well organized records is a good way to ensure that you can answer questions quickly when you need to. If you are uncertain as to how the laws and recommendations apply to you, contact a professional with any questions.

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Spencer Wilson

Spencer Wilson

Spencer Wilson, EA is a tax preparer based in Long Beach, CA. Spencer Wilson Financial Management Services has been serving the Greater Los Angeles Area and Orange County since 2004. <br /> We began in the heart of Naples in Long Beach and we continue to work hard offering tax preparation and planning, business accounting and bookkeeping and payroll services . <br /> We have helped many different people and businesses succeed financially and take control over their finances.

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