Tax season is over. And if you’re like many Americans, you stored your 2013 tax files in the basement, garage or a closet.
Year after year, all those tax documents pile up, which is why it makes sense to weed them out. What I’m sharing with you today is a quick review on what you should save and what you can toss.
You should keep your tax returns and supporting documents at least until the statute of limitations expires, which in most cases is three years. The federal government typically reserves the right to audit taxpayer returns for three years post-filing.
The IRS recommends that taxpayers hold onto all employment tax records for at least four years. The three or four-year period ends on whichever date is later – the day you filed your return or the tax deadline of April 15.
If the IRS suspects that you underreported your gross income by 25% or more, it can challenge your return for up to six years. I hope nobody reading this fits into that category, but if you file a fraudulent return or none at all, you need to hold onto your records forever.
If you seek a credit or refund after filing your return, you should keep your records for three years from the date you filed your original return or 2 years from the date you paid the tax, whichever is later.
For taxable accounts, you may need to keep brokerage statements until the securities are sold and any capital gains tax has been paid. Old records may be needed to calculate the cost basis of an investment, whether it’s a stock, a mutual fund or other security. The cost basis is necessary to determine how much capital gains tax (if any) is owed when you sell an investment. Without the records, you could owe 15% or more on an investment’s sale price.
If your current custodian has the correct cost basis for all your investments, you probably don’t need to keep these investment records.
You should also hold onto records related to property that you own to determine the gains or losses you may capture when you sell a house or other real property. You should keep these documents until the statute of limitations expires for the year in which you dispose of the property.
It’s not necessary to keep paper copies of all your tax records. The IRS accepts digital copies of documents. You can scan your documents, for instance, and put them on a hard drive that you keep in a secure place. Another alternative is to keep a backup of the files on a cloud service like Dropbox. In addition, some tax preparers give you a CD containing your tax data after completing your return. If you do store your hard copies, consider keeping them in a fire-proof safe.