What Tax Records to Keep and for How Long

February 25, 2014

How long should you keep your tax returns? 

Generally, you should keep an income tax return and supporting records (i.e., W-2 forms, 1099 forms, Schedule K-1s, closing statement for the sale of your home, charitable contribution receipts, etc.) at least until the “statute of limitations” for the return runs out. The “statute of limitations” is the period of time in which you can amend your tax return to claim a credit or refund or in which the state or the IRS can assess additional tax. Generally, the statute of limitations period is three years. Although you can get away with keeping your tax returns for only three years, we recommend that you keep your income tax returns and supporting documents for a full six years. Why six years? The IRS has up to six years to assess additional taxes if it determines that you omitted a substantial amount of income from your return.

Six years is a good general rule. However, if you own stock that might qualify for the worthless securities deduction, you should keep your returns and supporting documentation for seven years. Why seven years? Sometimes it is difficult to determine the exact year that a security becomes worthless. As a result, Congress has provided a special seven year statute of limitations period for reporting a loss from worthless securities.

Your tax records should include your U.S. Postal Service or electronic mailing receipts. If the IRS doesn’t receive or can’t find your return, having a receipt showing the date the return was submitted will save you from penalties.

Planning ahead—what records should you be keeping for future tax returns? 

The following general rules will help you maintain the records you will need for your future income tax returns:

Investments: Keep records of each investment purchase (e.g., stock, bond, mutual fund, etc.) that you make. Also, keep records of any return of capital that you receive from an investment as well as any additional capital contributions that you make for an investment. All of these records will help you establish your “income tax basis” in the investment. Generally, your “income tax basis” is the amount you have invested in the investment and it is used to determine the amount of your gain/loss when you sell the investment. When you sell an investment, the purchase records, the additional capital contribution records, and the return of capital records should be kept with your tax returns for the year of the sale.

Real Estate: Keep the closing/settlement statement for any home or real estate that you purchase. In addition, you should keep the receipts for any improvements that you make to the home/real estate. The receipts and the closing/settlement statement will help you establish your income tax basis in the home/real estate when you sell it. When you sell your home/real estate, the closing/settlement statement and receipts should be kept with your tax returns for the year of the sale.

Records that Establish Your Basis in Other Assets: If you are divorced, you should keep copies of your divorce judgment and other divorce agreements because they will help you determine the tax treatment of the assets you received as part of the divorce settlement. If you inherit property (other than cash), you should keep a copy of the decedent’s estate tax return and/or the Inventory for the decedent’s estate because it will help you establish your income tax basis in the inherited property when you sell it. If you receive property (other than cash) as a gift, you should keep a copy of the gift tax return that the donor filed for the gift because it will help you establish your income tax basis in the gifted property when you sell it. If you make non-deductible contributions to an IRA, you should keep records of these contributions because they will help you determine the taxable amount of the distributions that you receive from the IRA. Copies of the records described in this paragraph should be kept with each income tax return that they support. However, these records may apply to more than one year’s income tax returns. If that is the case, you should also keep copies of these records in a separate file until you are certain that they will not be needed to support future income tax returns.

Depreciation: If you own depreciable property (e.g., rental real estate, etc.), you should keep records of the method used to calculate depreciation and a schedule of all depreciation claimed in previous years, as well as the other records described above, because these records will help you determine your adjusted income tax basis in the property when you sell it. When you sell the property, keep these records with the tax returns for the year of the sale.

If you have any questions about how the information in this article may affect you or your business, please contact Carolyn Hegge at chegge@stroudlaw.com or (608) 257‑2281 or your Stroud attorney.

DISCLAIMER: The information in this article is provided for general informational purposes only, is not necessarily updated to account for changes in the law, and should not be considered tax or legal advice. This article is not intended to create, nor does the receipt of it constitute, an attorney-client relationship. You should consult with your own legal and/or financial advisors for legal and tax advice tailored to your specific circumstances.