Record Retention Guide

How Long Should You Keep Your Tax Records in the U.S.A.?

The I.R.S. recommends that tax payers should hold on to any of their records involving money transactions — prior tax returns; cancelled checks; bills; credit card and other receipts; etc. — for as long as may be needed to ensure the proper administration of paperwork and provision of the Internal Revenue Code. In other words, the I.R.S. suggests that you keep your tax records for about three years, but sometimes longer.

This time of holding is known as the period of limitations. By keeping your records within this period, you are able to amend a return to claim a credit or refund, or allow the I.R.S. to assess additional tax. Table 1. contains a list of limitation periods that apply to income tax returns. Unless stated otherwise, returns filed on or before the due date are seen as the same, from there the years are then counted.

Table 1. Period of Limitations

IF you… THEN the period is…
1 Owe additional tax and (2), (3), and (4) do not apply to you 3 years
2 Do not report income that you should and it is more than 25% of the gross income shown on your return 6 years
3 File a fraudulent return No limit
4 Do not file a return No limit
5 File a claim for credit or refund after you filed your return The later of 3 years or 2 years after tax was paid.
6 File a claim for a loss from worthless securities 7 years

Property: Tax records pertaining to property should be kept until you dispose of the property by a taxable means. Records can aid in figuring your basis for calculating gain or loss when the property is sold, or otherwise disposed, and should therefore be retained.

Normally, in the case of receiving property via a non-taxable exchange, the basis of your new property is the same as the basis of the older property. Thus, records should be kept of both properties, until a specified period of limitations expires, such as disposing of the older property.

Keeping records for when tax purposes appear moot: When the question of importance arises for the keeping of your tax records after an extended period of time, it is recommended that you continue to hold on to them, whether the I.R.S. requires them anymore or no. This is suggested, because your insurance company or creditors may request your tax records later on.

Why Should You Keep Your Tax Records?

Like a good credit score, keeping your tax records can show banks and businesses that you maintain good transactions, such as when getting a loan or merely for insurance purposes. Good records will help you with:

  • Identifying sources of income. Property and money can be received from multiple sources. Therefore they should be kept separate one from another in order to organize more easily business from non-business incomes, as well as taxable from non-taxable incomes.
  • Keeping track of expenses. Simply by holding on to your tax records, you may not forget an expense as easily. This can help when claiming a deduction by determining if you can itemize deductions on your tax return.
  • Keeping track of the basis of property. In doing so, the records can show the original cost of the property, as well as any improvements or additions made, which can fluctuate the basis.
  • Preparing tax returns.¬†You need records to prepare your tax return. Good records help you to file quickly and accurately.
  • Supporting items reported on tax returns. In case the I.R.S. has a question about an item on your tax return, good record keeping can help you to answer their question, and thus allow both parties to arrive at an understanding with little effort. Then no further inquiries on the correct tax will be needed proceeding the initial query. Without records, it may exhaust your time by trying to procure various statements, and could even cost you in penalties, should the records be unavailable.

Kinds of Records You Should Keep

Basic records

Basic records are documents that everybody should keep, in order to prove your income and expenses. If you are a homeowner or hold any investments, your basic records ought to contain documents related to those items.

Table 2. Proof of Expense and Income

FOR items concerning your… KEEP as basic records…
Income
  • Form(s) W-2
  • Form(s) 1099
  • Bank statements
  • Brokerage statements
  • Form(s) K-1
Expenses
  • Sales slips
  • Invoices
  • Receipts
  • Cancelled checks or other proof of payment
  • Written communications from qualified charities
Home
  • Closing statements
  • Purchase and sales invoices
  • Proof of payment
  • Insurance records
  • Receipts for improvement costs
Investments
  • Brokerage statements
  • Mutual fund statements
  • Form(s) 1099
  • Form(s) 2439

Income

Amounts reported as income on your tax return are proven in your basic records. Such income may include: wages; dividends; interest; and partnership or S-corporation distributions. Your records prove also that certain amounts are non-taxable, such as interest exempt from tax.

Note: Please keep Copy C from a Form W-2, until you begin receiving social security benefits. Doing so will aid in protecting your benefits, should a case arise where your work record or earnings of a particular year are called into question. (For workers over 25 of age) review the information shown on your annual Social Security Statement.

Expenses

The expenses for which you claim a deduction (or credit) on your tax return are proven in your basic records. Such deductions may include: alimony; charitable contributions; mortgage interest; and real estate taxes. Child daycare expenses you may also claim for credit.

Home

If the basis of your home has remained the same or has been adjusted, your basic records should show you the history. Why this is important is because this information can determine if you will have a gain or loss when you sell your home, or, if you use part of your home for business purposes or rent, to help figure depreciation. Cost of improvements, purchase price, or settlement or closing costs should show in your records. What also might show are deducted casualty losses and insurance reimbursements for casualty losses. Furthermore, they ought to include a copy of Form 2119, Sale of Your Home, if your home was sold before May 7, 1997, and postponed tax on the gain from that sale.

Sales price and any selling expenses, such as commissions, should be present on your records when you sell your home.

Investments

Investments include bonds, stocks, and mutual funds. Basic records should allow you to determine your basis in an investment, and whether you have a gain or loss when one is sold. Records should also show you commissions, and purchase and sales price, as well as any reinvested dividends, stock splits and dividends, original issue discount (O.I.D.), and load charges.

Proof of Payment

Proof of payment records should be kept in order to support certain amounts shown on your tax return. However, a proof of payment alone is not enough to prove the item claimed on your return is allowed. You should also keep other documents on hand that will provide the adequate proof you need.

Generally, payments are proved with cash receipts, financial account statements, credit card statements, cancelled checks, or substitute checks. Should you make a payment in cash, it is recommended to acquire a dated and signed receipt that shows the amount and reason for payment.

If an electronic funds transfer is made in the form of a payment, an account statement may suffice as proof.

Table 3. Proof of Payment

IF payment is by… THEN the statement must show the…
Cash
  • Amount
  • Payee’s name
  • Transaction date
Check
  • Check number
  • Amount
  • Payee’s name
  • Date the check amount was posted to the account by the financial institution
Debit or credit card
  • Amount charged
  • Payee’s name
  • Transaction date
Electronic funds transfer
  • Amount transferred
  • Payee’s name
  • Date the transfer was posted to the account by the financial institution
Payroll deduction
  • Amount
  • Payee code
  • Transaction date

Account statements: A legible financial account statement prepared by your bank or other financial institution may be able to prove your payment.

Pay statements: If you have union dues or medical insurance premiums, you may have deductible expenses withheld from your paycheck. By keeping your year-end or final pay statements, you will have proof of payment for these expenses.

Specific Records You Should Keep

To follow is an alphabetical list of some items that require specific records, in addition to your basic records.

Alimony

In the case of paying or receiving alimony, it is best to keep a copy of your written separation agreement or divorce, separate maintenance, or support decree. Your ex-spouse’s social security number you will need to know, if paying for alimony.

Using Your Home for Business

If you use part of your home for business purposes, or if you are renting out part of it, you may be able to deduct certain expenses connected to those uses of your home, and should therefore keep records of all transactions or business expenses and uses.

Theft and Casualty Losses

Before deducting a casualty or theft loss, you must be able to prove the accident or loss of property. Your records should support the claim.

For a casualty loss, your records should show:

  • The type of casualty (car accident, fire, storm, etc.) and when it occurred,
  • That the loss was a direct result of the casualty, and
  • That you were the owner of the property.

For a theft loss, your records should show:

  • When you discovered your property was missing,
  • That your property was stolen, and
  • That you were the owner of the property.

Child Care Credit

Should persons or organizations provide daycare services for your child or dependent, you should give the name, address, and taxpayer identification number to claim credit. A Form W-10, Dependent Care Provider’s Identification and Certification, can be used, or other various sources to obtain the information from the daycare provider. You should store the information with your tax records.

Contributions

To prove that you make annual contributions, you should keep your records, whether they be cash, non-cash, or out-of-pocket contribution expenses. Please see Publication 526, Charitable Contributions, if you seek information about contributions or types of records to keep.

Credit for the Disabled or Elderly

To claim disability credit below the age of 65, your physician must complete a statement certifying that, on the date of retirement, you were permanently and totally disabled.

You should keep this certified statement in your records, but do not have to file it with your Form 1040 or Form 1040A.

Seeing that the Department of Veterans Affairs (V.A.) certifies you as permanently and totally disabled, you may substitute V.A. Form 21-0172, Certification of Permanent and Total Disability, for the required-to-keep physician’s form.

Education Expenses

If your records can prove your expenditure for the year in regards to education expenses, you could claim certain tax benefits. If you qualify, you could exclude income items such as interest on U.S. savings bonds, qualified scholarship, or reimbursement from your employer. Certain credits or deductions you may also qualify for. Documents, such as transcripts or course descriptions, or that show period of enrollment and cancelled checks and receipts that verify amounts you spent on tuition, books, and other educational expenses should be kept.

Exemptions

To claim an exemption for your spouse or qualifying child or relative as a dependent, records kept will support the deduction.

Employee Business Expenses

For a discussion of which records to keep concerning employee business expenses, please see Publication 463, Travel, Entertainment, Gift, and Car Expenses.

Energy Incentives

If you wish to claim one of the tax incentives for the purchase of energy-efficient products, you should keep records to prove:

  • The price of the purchased property,
  • How and when you acquired the property, and
  • That the property qualified for the credit.

The following documents may show this information:

  • Cancelled checks.
  • Manufacturer’s certification statement.
  • Purchase and sales invoices.

Gambling Winnings and Losses

You must keep an accurate diary of your winnings and losses that includes the:

  • Date and type of gambling activity,
  • Name and address or location of the gambling establishment,
  • Names of other persons present with you at the gambling establishment, and
  • Amount you won or lost.

Health Savings Account (H.S.A.) and Medical Savings Account (M.S.A.)

The distribution of payments from your H.S.A. or M.S.A. for each qualified medical expense should have recorded names and addresses of each person whom you paid, as well as the date of payment.

Individual Retirement Arrangements (I.R.A.’s)

Please maintain copies of the following forms and records, until all distributions are made from your I.R.A.(‘s).

Form 5498, I.R.A. Contribution Information, or similar statement received for each year showing contributions you made, distributions you received, and the value of your I.R.A.(‘s).

Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, I.R.A.’s, Insurance Contracts, etc., received for each year you received a distribution.

Form 8606, Non-deductible I.R.A.’s, for each year you made a non-deductible contribution to your I.R.A. or received distributions from an I.R.A., if you ever made non-deductible contributions.

Please see Publication 590, Individual Retirement Arrangements (I.R.A.’s), for a worksheet you can use to keep a record of yearly contributions and distributions.

Medical and Dental Expenses

You should keep records of transportation expenses that are primarily for and essential to medical care, as well as records concerning regular medical expenses. Such expenses can be recorded in a diary. Fuel and oil expenses directly related to this kind of transportation should also be recorded. If you wish not to keep records of your actual expenses, you may log the miles traveled in a car for medical purposes, using the standard mileage rate. Any parking fees, tolls, taxi fares, and bus fares should be recorded as well.

Please see Publication 502, Medical and Dental Expenses (Including the Health and Coverage Tax Credit), for information on medical expenses and the standard mileage rate.

Mortgage Interest

You should receive Form 1098, Mortgage Interest Statement, if you paid mortgage interest of $600 or more. Please keep the form, mortgage statement, and loan information in your records. Please see Publication 936, Home Mortgage Interest Deduction, for information on mortgage interest.

Moving Expenses

Some expenses can qualify for deduction concerning moving expenses that are not reimbursed. Please See Publication 521, Moving Expenses, for more information on what expenses qualify, and what records you need.

Pensions and Annuities

Please fill out the worksheet in your tax return instructions in order to figure out the taxable part of your pension or annuity. Then you should keep a copy of the completed worksheet, until your contributions are fully recovered. Please see Publication 575, Pension and Annuity Income, or Publication 721, Tax Guide to U.S. Civil Retirement Benefits, for more information on pensions and annuities.

Taxes

To prove the amount of state withholding, you should keep a copy of Form(s) W-2 and Form(s) 1099-R, that show state income tax withheld from your wages and pensions. You ought to keep a copy of the form or your check(s), if you made estimated state income tax payments.

Please also keep copies of your state income tax returns. The state may send you Form 1099-G, Certain Government Payments, if you received a refund of state income taxes.

Please keep, also, tax assessments, mortgage statements, or other documents as records of the real estate and personal property taxes for which you paid.

If deductions were made with actual state and local general sales taxes instead of using the optional state sales tax tables, you should maintain your physical receipts that show general sales taxes paid.

Tips

To accurately report your tips on your tax return, you should maintain a daily record. You may use Form 4070A, Employee’s Daily Record of Tips, found in Publication 1244, Employee’s Daily Record of Tips and Report to Employer, to record the tips you received.