Sorting Out Your Paperwork: A Breakdown of How Long to Keep Tax Documents

Sorting Out Your Paperwork: A Breakdown of How Long to Keep Tax Documents

As the tax season approaches, it’s time to start thinking about the piles of documents and receipts that have accumulated over the past year. Keeping tax documents organized is crucial, not only for tax purposes but also for future reference and audits. The question is, for how long should you keep tax documents? Here’s a breakdown to help you sort out your paperwork.

Tax Returns
According to the Internal Revenue Service (IRS), you should keep tax returns indefinitely. It’s a good idea to keep electronic or physical copies of your tax returns, including all forms and schedules. Tax returns are important documents that provide a record of your income, deductions, and credits, so they may be needed to serve as proof of income for loans, mortgage applications, immigration purposes, and other legal situations.

Supporting Documents
Supporting documents are the records and receipts that support the items shown on your tax returns. Examples include W-2s, 1099s, receipts, invoices, bank statements, and cancelled checks. The general rule of thumb is to keep supporting documents for up to seven years following the date tax returns were filed or due, whichever is later. This timeframe is based on the fact that the IRS has up to six years to audit a tax return and up to three years to assess additional tax or issue a refund.

However, there are some exceptions to this rule. If you have investment-related transactions, the timeframe is longer. Investment-related transactions include buying and selling stocks, bonds, mutual funds, and other securities. For these transactions, you should keep the supporting documents for as long as you own the investment, plus seven years after you sell it. This is because you’ll need the information to calculate capital gains and losses when you sell the investment.

Real Estate Documents
If you own real estate, you should keep records related to the property for as long as you own it, plus seven years after you sell it. This includes records of the purchase, sale, and improvements made to the property. Keeping these records will help you calculate capital gains or losses when you sell the property, as well as help you track the cost basis of the property.

Pay Stubs
Many people accumulate pay stubs throughout the year, but it’s not necessary to keep them all. Instead, you can keep them until you receive your W-2 from your employer, which should summarize all of your earnings and taxes withheld for the year. Once you receive your W-2, you can shred the pay stubs.

Conclusion
Keeping tax documents organized and easily accessible is important for tax purposes, but it also provides valuable information for legal situations and audits. While there are general guidelines for how long to keep tax documents, it’s important to be aware of any exceptions based on your specific situation. By keeping records organized and secure, you can avoid stress and save time when tax season rolls around.

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