Storing tax documents properly is crucial for maintaining financial security, ensuring compliance with tax laws, and protecting yourself in case of an audit. While some records can be discarded after a few years, others should be kept much longer. Below is a breakdown of what to keep, for how long, and how to dispose of old records securely.
Documents to Retain for At Least Three Years
For most individuals, the IRS recommends keeping tax records for a minimum of three years from the date a return was filed or its due date—whichever is later. This is the typical audit window for the IRS, meaning they generally won’t request records beyond this period unless special circumstances apply. Here are the key documents to store for at least three years:
- Filed Tax Returns – Keep copies of both federal and state returns. These serve as crucial references in case of discrepancies, audits, or future financial planning.
- W-2 Forms – These forms report income and withholdings from your employer and can be useful for verifying past earnings.
- 1099 Forms – Whether it’s 1099-INT for interest, 1099-DIV for dividends, or 1099-MISC for self-employment earnings, these forms document income outside of standard wages.
- Mortgage Interest Statements (1098 Forms) – If you pay mortgage interest, keeping these forms helps document deductible expenses.
- Receipts for Tax Deductions and Credits – Supporting documents for deductions like medical expenses, education credits, and dependent tax credits should be stored for at least three years.
- Retirement and Investment Account Contributions – Records of IRA, 529 plan, and HSA contributions may be useful if you need to prove tax-free withdrawals or deductions later.
- Charitable Donations – Hold onto receipts for any charitable contributions claimed as deductions.
- Property Tax and Mortgage Records – Retain these documents for at least three years to ensure proper tax reporting, though in some cases, longer retention may be necessary.
- Records of Investment Sales – If you sold investments, keep records of both purchase and sale dates to accurately calculate capital gains taxes.
When to Keep Documents Longer Than Three Years
Although three years is the general rule, there are circumstances in which tax documents should be kept for longer periods:
- Six Years – If you underreport income by more than 25% of your gross income, the IRS has six years to audit your return.
- Indefinitely – If you fail to file a tax return or file a fraudulent one, the IRS has no time limit to assess taxes owed. Keeping financial records indefinitely in these cases could be necessary.
- W-2s for Social Security Verification – Some financial advisors recommend keeping W-2 forms permanently to verify Social Security earnings, especially if errors arise in your benefits calculation.
- Home Purchase and Improvement Records – If you own a home, maintain records of the purchase price, major renovations, and upgrades for as long as you own the property. These documents help calculate your cost basis, which affects capital gains taxes when selling.
- Foreign Tax Credit Documentation – If you claim a foreign tax credit, keep related records for at least 10 years, as these credits may be carried forward.
Secure Disposal of Tax Documents
Once a tax document is no longer needed, disposing of it securely is critical to prevent identity theft. Here are some best practices:
- Use a Shredder – Shred paper records, including old tax returns, W-2s, and bank statements, before discarding them.
- Avoid Regular Trash and Recycling Bins – Simply throwing away financial documents can put you at risk of data theft. Always destroy sensitive paperwork.
- Securely Delete Digital Records – If you store tax files electronically, permanently delete outdated records from your hard drive and use data-wiping software before disposing of old computers.
By keeping your financial records organized and disposing of outdated documents safely, you can protect yourself from tax-related issues and identity fraud while ensuring compliance with IRS guidelines.
Important Disclosures: This article is not intended to provide, and you should not rely upon it for accounting, legal, tax or investment advice or recommendations. We are not making any specific recommendations regarding any financial planning, investment or tax strategy, and you should not make any financial planning, investment or tax decisions based on the information in this article. This article is intended to be educational in nature and to discuss a few limited aspects of very complex legislation or other complex subject matters. This article is not a comprehensive or complete summary of considerations regarding its subject matter. We recognize that every individual has different needs and the opinions expressed in this article may not be appropriate for everyone. Please consult with a Freestone client advisor, accountant, or lawyer regarding options specific to your needs. Please note that Freestone does not approve or endorse any third-party content hyperlinked to in this article.