As we approach the end of another calendar year, it can be tempting to clear out all those backlogged tax files and start fresh for 2010. But don’t start feeding all those old records to the shredder just yet—first, consider the following.
As a general rule, CPAs recommend hanging onto the past three years’ worth of tax records. That’s equivalent to the federal government’s statute of limitations for questioning or auditing your tax information. There are a few exceptions—some states have up to four years to examine your return, and the statute can be extended or removed in cases of fraud, significant income omission, or tax evasion. But taxpayers who have filed in a timely manner and paid any outstanding taxes by the due date can confidently purge any records three years after the date the return was filed.
It’s important to note that the three-year rule only applies to supporting documents and information related to your tax return. Other records, specifically those that detail capital assets, should be kept until the end of the statute period following their liquidation. Below are some examples:
- Tax returns: Although supporting documentation can usually be purged after the three-year mark, it’s wise to keep the actual returns themselves. These can prove invaluable in securing a loan or applying for insurance.
- Income and expenses: Hang onto any and all documents that verify your income for at least three years after you file. These include W-2s, 1099s, bank statements, and brokerage statements. Records of business-related expenses should also be kept.
- IRA contributions: Retain records of non-deductible contributions until the money is withdrawn, to avoid getting taxed twice on those funds.
- Stock information: Keep all records of stock ownership for at least four years after the sale of your shares. In the event of an audit, you’ll need these to verify any profit or loss resulting from the sale.
- Stock and mutual fund statements: Any stock dividends that are reinvested will reduce the amount of capital gain, thus lowering your taxable income. These statements should also be kept for at least four years after the sale, to provide a record of reinvested dividends.
- Home purchase and renovation receipts: If you’ve purchased a home or made significant improvements to a property you own, hang onto these records for at least four years after the sale of the property.
When in doubt as to whether to get rid of tax records, it’s best to give your CPA a call. He or she can help you determine the importance of the document and whether you’ll need to reference it down the road.
