Which Tax Records Should You Save And For How Long?

Tax season is over, but that doesn’t mean you can toss last year’s tax records and forget about them forever.  On the contrary, many of this year’s (and maybe even last year’s) financial and tax documents will help you complete your taxes next year and beyond.  There are some documents you only need to keep for a few years before it’s safe to throw them away.  Others, however, you really do need to hold onto forever, preferably in your safety deposit box.

Remember The 3 Year Rule

In general, the IRS has the right to go back and review your tax returns for a maximum of 3 years, so at a very minimum, you should keep all relevant tax records spanning the three most recent tax years handy (including support documentation such as W-2’s,  ad valorum tax receipts, property tax records, proof of charitable donations, etc).  However, if fraud is suspected the IRS is legally entitled to go back as far as 7 years in the past.  There is no legal requirement to keep records longer than 3 years, however, and one could make a case that keeping records that far back is more likely to benefit the IRS than you.  Personally, I only keep records for a total of 3 years.

Documents To Keep Longer Than 3 years

Most of the time, it’s safe to discard tax records after three years have passed.  There are a few kinds of documents, however, it’s important to keep much longer than that.  These documents fall mostly into the investment and home category.  Due to Uncle Sam’s incredibly generous capital-gains exclusion on the first part of the profit from selling your primary residence, it is extremely important to keep closing information (both purchase and sale) as well as detailed records of any property tax paid while you owned the home.  Since most people own their home more than 3 years at a time, you should keep these records for at least three years after the sale to comply with IRS requirements.  For many, this means keeping purchase records for decades if not forever.

You should also keep documents related to taxable investments for at least three years after you make a sell.  You will need these records to calculate your taxable gain whenever you sell for a profit (or calculate your tax deduction if you sell for a loss).  If you follow my advice and are a buy-and-hold investor, that may very well mean keeping these records for decades if not forever (if you pass them on to your estate).  Most brokerage firms these days keep buy-sell records for at least 10 years, so chances are you’ll be alright even if you don’t keep any records yourself.  Still, better safe than sorry.