Tax Tips

Which Documents to Shred, Which Ones to Keep – And for How Long

October 19, 2015 : Mike Slack - The Tax Institute

Mike Slack

Ed note: You filed a return. You got a refund. Everything is done, and you can trash all the tax documents, right? Wrong. In fact, you need to keep those tax records for a good, long time. Here’s how long exactly.

With the prevalence of identity theft, you may be wary of keeping copies of your tax and financial documents. So, when is it safe to destroy these documents? The answer depends on the document.

Tax Records

It is generally a good idea to retain your tax records for at least seven years. Even though this is longer than the IRS typically mandates; it may be wise to keep copies of your actual returns indefinitely. Your tax records are more than just copies of your filed income tax returns. Any document that supports something shown on your tax return is considered a tax record.

The IRS states that, at a minimum, you should keep tax records or a particular year’s return until the period at which you can still amend that return closes, or the IRS could assess additional tax. For most taxpayers, this means at least three years following the date you filed the return, or two years from the date you paid the tax on that return, whichever is later.

However, there are certain situations where the IRS requires taxpayers to retain their tax records longer.

4 Years – Any records pertaining to employment taxes (i.e. taxes withheld or paid on behalf of your employees) must be retained for at least four years after the date the tax became due or is paid, whichever is later.

6 Years – If you had income in the tax year that was not reportable on your return, and it was more than 25% of the gross income shown on your return.

7 Years – Your return includes a claim for a loss from worthless securities or a bad debt deduction.

Indefinitely – If you did not file a return for a given tax year, or the return that was filed was fraudulent.

Again, these rules are just the minimum. It is often advantageous to retain tax records for much longer periods, as they may be relevant for other purposes. For example, you may need to produce older tax records to insurance companies or creditors.

Personal Financial Records

When it comes to financial records that do not pertain to your income taxes, the rules vary depending upon the relative importance of the document. According to Lifehacker  and LearnVest the following guidelines should be followed when determining when to destroy a document:

A Few Days – ATM receipts and bank deposit slips after the transactions have appeared on your account.

1 Month – Receipts for credit card purchases. The credit card statement can be destroyed after a month as well.

1 Year– Utility bills, paycheck stubs, bank statements, brokerage statements (once you get the annual statement), and medical and dental expenses.

Never – Annual brokerage statements, receipts for capital home improvements (until the home is sold), and receipts for large purchases.

However, if any of these documents relate to your income taxes, they should be kept in accordance to the tax record rules rather than these guidelines.

Storage Practices

Remember that records should be kept in secure storage – whether that’s a password protected electronic file, a physical safe or a number of other options. Here are some best practices for how to protect the personal information on your tax and financial documents. (link to Kristin’s Tips for Protecting Tax and Financial Documents)

Mike Slack - The Tax Institute

Mike Slack - The Tax Institute

The Tax Institute

Mike Slack, JD, EA, is a senior tax research analyst at The Tax Institute. Mike leads research teams focused on business and investment tax issues.

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