Tax Record Retention: What You Can Discard After Filing Your Tax Return
TAX | 5.6.2023
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Key takeaways
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Long-Term Retention of Tax Returns: Always retain your tax returns indefinitely as a core practice in tax record retention, since they provide essential proof of your financial history and can be critical if audited by the IRS.
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Specific Duration for Supporting Documents: For efficient tax record retention, keep supporting documents like receipts and canceled checks for a minimum of three years, extending to six years if more than 25% of income is omitted on the return.
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Protecting Your Financial Documentation: Implement robust measures for safeguarding your tax records, including using secure storage like safe deposit boxes and maintaining easily accessible copies at home to ensure you're prepared for emergencies and compliance checks.
After you've filed your 2023 tax return, you may find yourself wondering about tax record retention—specifically, which personal tax documents you can safely discard and which you should keep. Understanding the guidelines for retaining tax records can help you if the IRS audits your return or queries your tax payments.
It is recommended to keep your actual tax returns indefinitely. However, when it comes to supporting documents such as receipts and canceled checks, the rules vary. Generally, unless there is a case of fraud or substantial understatement of income, the IRS has a three-year window from the date you filed your return (or its due date) to assess additional taxes. For instance, if you filed your 2020 tax return by the deadline of April 15, 2021, the IRS has until April 15, 2024, to question it. If you file late, the three-year period starts from the date you actually filed.
The duration for tax record retention extends to six years if you omit more than 25% of your gross income on your tax return. Additionally, if you fail to file a return, the IRS can assess tax at any time. Keeping a copy of each year's tax return is crucial, especially if the IRS claims a return was never filed for a specific year.
Property-Related Records for Tax Record Retention
The importance of tax record retention becomes evident when dealing with property transactions. For example, if you bought a home in 2008, made improvements in 2015, and sold it recently, you need to know your basis in the home to determine tax implications. This basis is calculated as your original purchase cost plus any capital improvements. If audited, you would need to present records from 2008 and 2015 to establish your basis. Hence, these records should be kept for at least six years after filing your tax return for the year of sale.
Even if you qualify for the home-sale exclusion (up to $500,000 for joint filers), maintain all records related to home purchases and improvements. These documents are essential for proving your basis should the IRS inquire.
Additional Considerations for Tax Record Retention
The principle of tax record retention also applies to assets like stocks or shares in a mutual fund. Remember that each reinvestment of dividends is considered a separate purchase for tax purposes.
Marital Breakup and Tax Record Retention
In cases of separation or divorce, ensure access to all tax records that may affect you. It's prudent to make copies of these records, as accessing them later can be challenging. Retaining copies of joint tax returns and supporting documents is vital, as both parties are liable for any inaccuracies on a joint return.
Safeguarding Your Records
To protect your tax records against loss from theft, fire, or natural disasters, consider storing important documents in a safe deposit box or a secure location outside your home. Also, keeping copies in an easily accessible place at home is advisable for quick retrieval in emergencies.
Contact us
For more advice on tax record retention or if you have specific questions, feel free to contact us. Understanding these guidelines can ensure you maintain the necessary documentation while disposing of unnecessary paperwork, keeping your financial history well-organized and compliant.