Congratulations! You successfully finished your 2015 taxes and can now breathe a sigh of relief. But before you throw all of your tax documents stashed into a pile in the drawer or in the trash, it's important to know which documents you should keep in a safe and secure place, and for how long.
Why should you think about this now? Staying organized even after you filed your taxes will make your life a lot easier in the future - especially when life events like buying a home or refinancing your mortgage require you to show past tax returns, W2s and other tax-related documents. Preparing your documents now will also save you time and money when it's time to file next year.
The Three-Year Timeline
When I talk about tax documents, I'm specifically referring to the copy of the tax return you filed, along with any W2s, logs for mileage, 1099s, 1095s, receipts or any paperwork that will support the tax deductions or credits you may have claimed. This includes anything that you used to prove the state of your finances on your tax return.
The Internal Revenue Service recommends you keep your tax return and any supporting documents for at least three years after the date you filed; after that, the statute of limitations for an IRS audit expires in most cases.
This three-year statute of limitations is for the benefit of both you and the IRS. The benefit for you is having a set amount of time to claim any tax refund that is owed to you. On the flip side, it gives the IRS three years to levy another tax if you made a mistake while reporting your income.
Income documents to keep
This includes W2s, 1099s, rental income documents and student loan forms. You should keep these until the three-year limitation period on the return runs out. If you plan to amend a return to claim a credit or refund or that you can be assessed additional tax by the IRS, it's important to hold onto these documents until the three-year statute of limitations has passed.
Expense documents to keep
This includes property taxes, mortgage interest, student loan interest, business expenses, health care and medical expense information and any other expense-related tax forms. Any documents associated with assets should be kept until the time you sell or no longer own the property. Student loan documentation should be kept until payments are complete.
The timeline for how long you need to keep tax documents is a little longer when it comes to dealing with your retirement accounts - those documents you should plan to keep for seven years after the funds have been completely withdrawn. You should also hold on to your documentation for that period of time if you claim a deduction for bad debt or for worthless securities, such as stocks and bonds, according to the IRS.
If more than 25 percent of your gross income was unreported on your tax return, the IRS has six years to impose any additional tax that is required. If this situation fits your finances, keep those records for at least six years. There is no limit to how long the IRS has to audit a fraudulent return, so if you purposely left out some income one year, you need to hold on to your tax return indefinitely.
For state returns, it's important to check with your state's recommendations as tax laws and recommendations on saving documents vary by state. For example, California and Arizona have a four-year statute of limitations, while Montana has a five-year statute.
How to store or safely dispose your tax documents
For the tax documents you're keeping, choose one central place to keep all your relevant tax information - this could be a folder, file boxes or whatever works best for you. With technology these days, it's easy to back up all of your financial records on your computer and reduce some of the clutter in your life - just be sure to install or update anti-virus software on your computer and install security patches and software updates as soon as they are available.
If you do choose to throw away your records, remember that shredding is always a good idea.