If you’ve ever applied for a health plan, taken out a loan, or had to fix your tax return, you know a carefully stored record of tax information can be a lifesaver. Making a habit of reorganizing your records every year adds a little additional work to the job of tax filing, but it can save you a lot of time down the line.
First of all, you won’t be scrambling to find a dozen scattered documents when you need to prove income and expenses.
Secondly, orderly tax info can protect you if you’re audited, or score you any refunds you earned but didn’t receive. I once got a surprise audit of my taxes two years later; I’d already forgotten about my taxes, of course, but the IRS hadn’t. Keeping my documents handy would have helped me get to the bottom of the situation much more quickly.
How long should you keep tax documents?
Tax record storage is helpful for everyone, but it’s especially crucial if you have more than one source of income, your income changes from year to year, or your taxes are otherwise paperwork-heavy.
While three years is the standard for state and federal tax returns and most tax-related paperwork, there are some documents you’ll want to keep for longer.
|1 year||Pay stubs; monthly investment statements; monthly health plan statements|
|3 years||Federal and state returns; proof of income; annual retirement statements and contributions; investment income; homeowner paperwork; charitable contributions|
|4 years||Employment tax records (for employers/business owners)|
|6 years||Business expenses and paperwork (for employers/business owners)|
|7 years||Records of early withdrawals on retirement funds; bad debt deductions; securities losses|
|Indefinitely||Records of capital assets; documents for any years you didn't file a return|
Pay stubs don’t need to stick around longer than a year; after you’ve checked them against your W-2s or 1099s to make sure the totals match, you can discard them.
The same goes for any monthly investment statements from a brokerage or health plan after you check them with year-end statements.
Federal and state returns should be kept for at least three years.
The IRS also recommends keeping the following documents for three years after the federal return due date (even if you filed before that date):
The IRS starts calculating the taxes you owe by looking at what you’ve earned, so keep evidence of all earnings, even if you didn’t get a tax form for them (the IRS calls this “miscellaneous income”). You may need to keep a manual record of irregular income streams, such as cash tips.
- W-2 forms
- 1099 forms
- Any other proof of money you earned
This largely applies to business-related expenses, since those are the ones the IRS cares about, but bank statements help if you need to trace your cash flow for any reason. Make sure you save:
- Receipts for business purchases
- Bank or credit union statements (your bank probably keeps track of these in an online account)
- Accounting records and profit/loss statements if you’re self-employed
Whether your retirement account is tax-deductible or not, the IRS still considers it in the big picture of your income and expenses. Save the following:
- Annual statements
- Tax forms for IRA, 401(k), or other retirement plan contributions
Insurance documents can prove your qualification for tax credits, and you may need to prove coverage if the IRS asks.
- Any health coverage-related tax forms, such as 1095-A, 1095-B, and 1095-C forms
- Insurance cards
- Annual provider statements
Investment income is often taxable, so hold onto your proof of earnings (or non-earnings if your investments had a rough year).
- Tax forms showing any income and interest you earned on investments, such as 1099 or 2439 forms
- Annual brokerage statements
- Transaction records for any investments or property you’ve sold, for at least three years post-sale
You’ve probably kept your homeowner paperwork anyway, but if you’ve sold or improved a property recently, keep related documents for at least three years in case the IRS wants details. Though you don’t have to pay tax on most home-sale profits, you may be able to deduct for significant renovations that improve property value.
- 1098 forms showing mortgage interest deductions
- Purchase records and receipts for major home improvements (if you sell the house, keep these for at least three years post-sale)
- Closing statements, at least three years post-sale
- Insurance records
Note: this also applies to transactions on any rental properties you own.
These records are only necessary to prove any donations you deducted from taxes.
- Canceled checks
If you want to double-check a particular tax year before you get rid of documents, the IRS can provide an account transcript at no charge. Transcripts don’t reflect any changes you’ve made to the return after filing, however; if you want to order an entire prior-year return to reflect those changes, the cost is $50.
Employers and business owners should hold onto employment tax records for at least four years after the tax due date or the date taxes were paid (whichever is later).
In some cases, the IRS doubles the period of limitations. If you neglected to report taxable income, and if this income is over 25% of the gross income shown on your return, the IRS has up to six years to audit. They also claim they can go back six years if they find a “substantial error” on a return.
Self-employed workers who earn business income from a lot of different sources might want to abide by the six-year rule — even if you think you reported everything, it’s better to be on the safe side in case you made a mistake.
Read more: Got freelance income? 7 money-saving tax tips
Seven years is the statute of limitations for claiming a bad debt deduction or a loss from worthless securities. So if you claim (or suspect you’ll need to claim) a major loss on your taxes because you’ve had a rough year on the stock market or loaned money to someone who hasn’t paid you back, hold onto any related records for seven years.
And if you withdraw early funds from a retirement account for any reason — some accounts like Roth IRAs let you take out money before you hit retirement age — keep those records for seven years as well, since the IRS keeps tabs on withdrawals.
Read more: How to take out a 401(k) loan… and why you shouldn’t
Records of capital assets, like paperwork for buying and selling a home (or making improvements that add major value to your home), should be kept permanently.
It’s a good idea to keep any property or asset-related tax records for as long as you can. At a minimum, you’ll need real estate, business, and stock asset records for as long as you own the asset, then for up to three years after you sell it. Insurance companies and creditors may need you to hold onto documents for even longer than the IRS does, so check with them before discarding anything.
Read more: Gains and losses: What will be taxed and what can I claim?
You’ll also need to permanently keep financial documents for any year you didn’t file a return, or years you might have filed a fraudulent return; for example, if you were a victim of tax-based identity theft. In these two cases — absent and fraudulent returns — the IRS has no time limit on audits.
What should be included in tax records?
Your saved records should include both the tax returns themselves and any paperwork you used to file taxes that prove the income, credits, or deductions you claimed. For most people this means, at a minimum:
- Tax return forms (federal and state)
- Wage statement forms, usually W-2s or 1099s
- Receipts for any deductible expenses
- Healthcare coverage documentation for you and any dependents (in case you need to show the IRS proof of coverage)
- Records of retirement fund contributions
- And any other documents relevant to tax filings, like acknowledgments of charitable donations or investment appreciation
Read more: Understanding tax credits, deductions, and adjustments
Why keep your tax records?
Having tax records on-hand is a good idea if you need to provide proof of income for non-tax reasons, which we all do at some point. Applications for loans, mortgages, income-sensitive healthcare plans, and student financial aid (for yourself or a dependent) require you to verify earnings in current or previous years.
Old documents are also a safety measure in case the IRS has questions or you need to file an amended tax return. Federal and state returns have a “period of limitations” — a window of time where the IRS can audit and calculate additional taxes you owe, or give you credits, deductions, and refunds you earned but didn’t get.
Read more: What are the chances of being audited?
For federal returns, this window is three years, but individual states may have longer periods. The IRS recommends you keep your records, just in case, until both periods of limitations run out.
Tips for storing tax documents
Saving these records can be tricky; you need an electronic backup system so you can share documents as necessary, but with enough security to protect your identity and financial info from anyone you don’t want to access it.
Organize your records
If you already have an organizational method that works for you, stick with it. Otherwise, it’s helpful to sort documents both by year and by type (income, expenses, retirement, healthcare, etc.). Your goal is to keep everything in the same place so you can find it quickly if the need arises.
Scan electronic versions of paper documents
You might have a mix of paper and digital records. Many companies still send correspondence by old-fashioned snail mail — most of my 1099s come to my mailbox in paper form, and my new health insurer sends all its documents via post.
While you can keep paper files and save them in a secure spot (like a locked desk drawer), it’s smart to have digital backups in case the hard copies are lost somehow, and it’s extremely helpful to consolidate everything into the same online system.
Scan and upload any paperwork to an electronic device and add it to your digital files. Use a scanner if you have one, or use a mobile scanning app — Adobe Scan comes highly recommended — if you have a lot of hard copies. A clear photo file of the document should work in a pinch (make sure you get all the essential information in the photo).
Back up digital files
After you save the files to your computer’s hard drive, back them up to an external flash drive just in case you lose internal storage data. Scammers sometimes infiltrate hard drives and block people’s access to documents, so you’ll want backup copies they can’t reach.
Store the external drive someplace safe, like a locked deposit box. And keep backing up your files periodically as you erase old ones and store new ones.
Keep everything secure
The IRS has some security recommendations, including installing anti-virus and firewall protection software if you haven’t done so already.
They also advise encrypting or password-protecting files with tax records. The process of encryption will depend slightly on the type of document and the software program you’re using; free encryption software tools can help get you started.
Another security trick, if you file taxes with online software, is to enable multi-factor authentication for each account you use. This authentication requires users to prove their ID through at least two steps (such as entering both a password and a code sent to your phone) making it more difficult for scammers to get through. The IRS is now using multi-factor authentication on its own tax site.
A final word from the IRS: they won’t ask you to send them sensitive information online, so if you get an unsolicited email or phone call asking for tax documents, it’s probably not legit.
Read more: 7 signs you’re at risk for identity theft
Use tax software to keep documents organized
Some of the best tax software programs save your info from year to year, so you don’t have to re-enter any stats that haven’t changed. If your income and deductible expenses are mostly the same each year, do yourself a favor and get software that imports your prior tax returns annually — most of the work will be done for you.
Read more: Best tax software compared
Dispose of old records safely
Once the period of limitation passes, you can delete files from your electronic devices, but keep in mind deleting files doesn’t remove the data from a device permanently.
Paper documents should be shredded so no one comes across your data in the trash or recycling bin. Many UPS stores offer shredding services; so does Office Depot. If you have patience and only a few paper files, a good pair of scissors can sometimes do the job.
The bottom line
Updating and storing your tax records is an ongoing job. The easiest way to get in the habit is to make record storage a mandatory part of your tax season to-do list every year, so you’re getting important tasks out of the way without expending much extra effort.
Having old tax documents on-hand will make your life easier year-round since these documents are widely accepted ways to prove income and business expenses. And in the unlikely event that you’re hit with an audit, you’ll have evidence to back you up so you don’t pay more than you owe.