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Here's how long you should keep tax records

Drowning in paper after tax season? How to sort it out

With tax season over for nearly everyone, a common question concerns how long you should keep tax returns and other financial records. Even in the digital age, much of our financial life is on paper, which makes many people hesitant to discard those records because they fear that they'll need them someday.

Sometimes this fear is well grounded. But keeping all your financial papers forever is hardly a good strategy. Aside from the ensuing piles, another problem is that you can create a security risk, given the amount of personal and financial information these papers contain.

For starters, you definitely don't need to keep all your tax records forever. The general rule is you're required to keep your tax returns and support items until the "period of limitations" has run out. That's the period during which you can amend your tax return to claim a credit or a refund, or the time the IRS has to asses additional tax you may owe.

Three years for tax returns

For most tax returns, that period runs for the three years from the date you originally filed, including extensions. This also includes supporting documentation for the income and deductions you reported. So you should keep your 2015 tax return (filed in 2016) and related papers until this year. After that, they're generally safe to discard or, even better, shred. IRS Publication 552 has all the rules.

Tips for financial spring cleaning

IIf it's possible you may have underreported income by 25 percent or more, you'll need to keep tax returns and related info for those specific years for six years. Underreporting can happen when you have substantial income from a closely held business or the cost basis records for property or securities sold are unclear. So it's best to keep records and returns for years that include out-of-the-ordinary transactions and income from stock option exercises, trust income, etc., for six years. If the IRS hasn't raised any issues about your 2012 tax return by now, it should be safe to shred.

Another wrinkle: If you filed a return that included a claim for deducting worthless securities or a deduction for an uncollectable debt, you're required to keep it and related records for up to seven years.

If you were overly enthusiastic in disposing records or simply lost some, don't stress out. Copies of tax returns, all attachments and W-2s are generally available for seven years from the IRS. They can be obtained by filing Form 4506, Request for Copy of Tax Return, along with a $50 fee for each return.

An overview of retention times

Here' a quick guide for the most typical categories of financial records:

  • Federal and state returns and related records: Keep for three years and in certain circumstances, for either six or seven years
  • Investment and brokerage account statements: Keep for one year, including confirmations of all purchases and sales
  • Bank account statements: Keep for one year
  • Credit card statements: Keep for one year
  • Utility bills: Keep for one year
  • House purchase and sale statements: Keep for the time you own the property.

When to go long

Some tax records should be retained for a long time, and in some cases, indefinitely. For example, you should keep records of the cost of assets that can be sold or transferred for the entire time you hold the asset. This is referred to as the life-of-the-asset holding period.

Decluttering queen Marie Kondo

Also, keep all the documents related to the purchase of your home or other real estate including a HUD-1 settlement statement and related documents for as long as you own the home. Keep all records and receipts for home and property improvements for as long as you own the property until at least three years after you sold it and reported the transaction on your tax return.

If you refinanced a mortgage, keep a copy of the mortgage note and the HUD-1 settlement statement. You'll need to refer to the mortgage note to verify that adjustments to your interest rate are made correctly if you have an adjustable-rate mortgage. The settlement statement includes any deductible interest and points you paid.

Finally, remember that the IRS has an unlimited period to request information for years when you didn't file a return, and it can audit tax returns for any years that it suspects fraud.

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