It’s a good idea to keep your returns indefinitely. But you can generally toss supporting tax records three years after the tax-filing deadline, which is the time the IRS generally has to initiate an audit. Several states have four years to initiate an audit (you can find out about the rules from your state department of revenue or taxation; see the IRS’s archive of state tax agencies). The federal audit period extends to six years if you underreport your income by 25%, so Jeffrey Schneider, an enrolled agent in Port St. Lucie, Fla., recommends holding on to your records for at least seven years.
Supporting documents you should hold on to for at least three years include your Form W-2s or Form 1099s reporting income; other 1099s reporting capital gains, dividends or interest; Form 1098, if you deducted mortgage interest; canceled checks and receipts for charitable contributions; and records showing expenses for other deductions and credits. Also keep records showing eligible expenses for withdrawals from health savings accounts or 529 college-savings plans. If you have business expenses, keep records of those costs, such as for equipment purchases, phone bills, business travel and marketing expenses. If you claimed a home-office deduction, keep records of your rent or mortgage interest, homeowners or renters insurance, real estate taxes, utilities, and other eligible expenses. Keep receipts showing any tax-deductible retirement-savings contributions, such as to a deductible IRA, simplified employee pension or solo 401(k). Also keep Form 1095 showing that you had eligible health insurance, or records showing that you met the criteria for an exemption.
You’ll need to hold on to some tax records longer than the three-year audit period. One of the biggest mistakes people make is not keeping records that establish the basis of property and investments; those are used to determine the taxable gain or loss when you sell. “The most elusive information seems to be the basis information,” says Jerry Gaddis, an enrolled agent in Key Largo, Fla. You should keep purchase records for mutual funds, stocks and other investments held in a taxable account for at least three years after you sell the investment because you’ll need to report the purchase date and price when you file your taxes for the year they are sold. Brokers must report the cost basis of stock purchased in 2011 or later, and of mutual funds and exchange-traded funds purchased in 2012 or later, but it helps to keep your own records in case you switch brokers. If you inherit stocks or funds, keep records of the value on the day the original owner died to help calculate the basis when you finally sell the investment (and for at least the three-year audit period after that). Also keep records of reinvested dividends that you’ve already paid taxes on so you won’t be taxed on them again when you sell the stock.
Keep records of your home purchase for at least three years after you sell your home, as well as records of any significant home improvements that add to your home’s value, such as the cost of adding an extension or a new kitchen. Up to $250,000 in home-sale profit is excluded from taxes if you’re single (or up to $500,000 if you’re married filing jointly) if you live in the house for at least two of the five years leading up to the sale. But you could end up with a tax bill if you don’t live there that long or if your profits are higher. In that case, you can add the cost of those capital home improvements to the cost basis of your home when you sell and reduce any capital gains. See IRS Publication 523, Selling Your Home, for more information about the expenses that can be added to your basis.
Keep Form 8606 showing any nondeductible IRA contributions until all of your IRA money is withdrawn (plus at least the three-year audit period) so you can prove you’ve already paid taxes on the contributions and won’t be taxed on them again.
If you have a business, you should keep records for any assets that are still used in the business or are being depreciated, says Gil Charney, director at the Tax Institute at H&R Block.
Most online tax programs let you access your returns for five or six years (the returns may be available for only six months with some free tax-filing versions). TaxAct Online customers can access their returns for seven years after filing, and people who use the free edition starting this year can also access their returns for seven years. Any documents entered as part of the tax return will be stored digitally with the return, and you can also attach digital images and documents to the return, such as scanned images of W-2 forms, 1099 forms and receipts, says Tony Reding, tax analyst with TaxAct. TurboTax’s MyDocs and H&R Block’s MyBlock program also let you upload and store tax-related documents. For more information about online tax-filing programs, see our Guide to 7 Top Tax Software Programs.
For more information about the rules for keeping tax documents, see IRS Tax Topic 305 – Recordkeeping.
By: Kimberly Lankford
April 4, 2017