Okay guys, the most dreaded time has arrived – the tax season. Gosh! I wish I could explain how much I hate this season. Instead of reading books or cooking, I’m crunching numbers, sorting out the financial papers, tax forms, and important documents till midnight every day. Disgusting!
Yesterday, I was searching for an important tax form in my files. While I was searching for the paper, it struck me that there are too many old financial papers in the files. I have kept all of my tax documents and other financial documents in 4 big and fat files. The files are so heavy that you can carry only one file at a time.
It’s time to declutter.
If your condition is just like me and you’re thinking of disposing of your tax papers, then stick to this blog post because today I’m going to talk about how long you can hang on to your tax records. Don’t throw away your tax papers just like that.
How long should you hang on to your tax records?
If you ask my dad who belongs to the old financial school, he would tell you to keep your tax returns forever. His point is, ‘You never know when you might need them. Besides, old financial papers and tax documents give you a fair idea about your financial growth.’ But my opinion is different.
You can toss financial papers and tax papers 3 years after the deadline. If your tax returns are suspicious, the IRS has to initiate an audit within this period. However, some tax experts also suggest keeping tax records for 7 years.
The most important tax papers and other documents you should keep for more than 3 years are:
- Records of major home renovation
- Records of home purchase
- Records of mutual funds and stocks you purchased
- Records of mutual funds and stocks kept in taxable accounts to calculate the cost basis
- The form 8606 that can help you prove you have paid tax on the nondeductible IRA contributions
Tax documents you can keep for 3 years
Here are a few documents you should retain for at least 3 years.
- W-2s and 1099s forms showing your income
- Canceled checks for charitable donations
- 1099s forms showing dividends, interests, and capital gains
- 1098 form when you have deducted mortgage interest
Tax documents you can keep for 4 years
Employment tax returns after the date that the tax becomes due or is paid
Tax documents you should keep for 6 years
Keep your tax records and other financial documents if you don’t report your income properly, and it’s above 25% of the gross income reported on your return
Tax documents you should keep for 7 years
- Documents showing loss from worthless securities
Tax documents you should keep forever
- Keep records of everything if you don’t file income tax returns
- Keep all your financial records if you have filed a fraudulent return
What can you do your records for non-tax purposes?
Don’t destroy your records when you don’t need them for tax purposes anymore. Think if you have to retain them for other purposes. For instance, your insurance company may want to retain them longer than the IRS does.