Are you one of those people who is terrified of the IRS? Have a whole closet in your home dedicated to the last 20 years of tax returns? Scared to throw anything away? But is that reasonable?
As far as taxes are concerned the IRS spells it out this way:
The length of time you should keep a document depends on the action, expense, or event which the document records. Generally, you must keep your records that support an item of income, deduction or credit shown on your tax return until the period of limitations for that tax return runs out.
The period of limitations is the period of time in which you can amend your tax return to claim a credit or refund, or the IRS can assess additional tax. The information below reflects the periods of limitations that apply to income tax returns. Unless otherwise stated, the years refer to the period after the return was filed. Returns filed before the due date are treated as filed on the due date.
Note: Keep copies of your filed tax returns. They help in preparing future tax returns and making computations if you file an amended return.
Period of Limitations that apply to income tax returns
Keep records for 3 years if situations (4), (5), and (6) below do not apply to you.
Keep records for 3 years from the date you filed your original return or 2 years from the date you paid the tax, whichever is later, if you file a claim for credit or refund after you file your return.
Keep records for 7 years if you file a claim for a loss from worthless securities or bad debt deduction.
Keep records for 6 years if you do not report income that you should report, and it is more than 25% of the gross income shown on your return.
Keep records indefinitely if you do not file a return.
Keep records indefinitely if you file a fraudulent return.
Keep employment tax records for at least 4 years after the date that the tax becomes due or is paid, whichever is later.
The following questions should be applied to each record as you decide whether to keep a document or throw it away.
Are the records connected to property?
Generally, keep records relating to property until the period of limitations expires for the year in which you dispose of the property. You must keep these records to figure any depreciation, amortization, or depletion deduction and to figure the gain or loss when you sell or otherwise dispose of the property.
If you received property in a nontaxable exchange, your basis in that property is the same as the basis of the property you gave up, increased by any money you paid. You must keep the records on the old property, as well as on the new property, until the period of limitations expires for the year in which you dispose of the new property.
What should I do with my records for nontax purposes?
When your records are no longer needed for tax purposes, do not discard them until you check to see if you have to keep them longer for other purposes. For example, your insurance company or creditors may require you to keep them longer than the IRS does.
Personal documents are another thing altogether. Do I keep that receipt? Bank Statement? Suze Orman, financial guru, has a list for all of your personal documents:
What Personal Documents Should You Keep and for How Long?
Keep until warranty expires or can no longer return or exchange
Sales Receipts (Unless needed for tax purposes and then keep for 3 years)
What to keep for 1 month
ATM Printouts (When you balance your checkbook each month throw out the ATM receipts)
What to keep for 1 year
Paycheck Stubs (You can get rid of once you have compared to your W2 & annual social security statement)
Utility Bills (You can throw out after one year, unless you’re using these as a deduction like a home office –then you need to keep them for 3 years after you’ve filed that tax return)
Cancelled Checks (Unless needed for tax purposes and then you need to keep for 3 years)
Credit Card Receipts (Unless needed for tax purposes and then you need to keep for 3 years)
Bank Statements (Unless needed for tax purposes and then you need to keep for 3 years)
Quarterly Investment Statements (Hold on to until you get your annual statement)
What to keep for 3 years
Income Tax Returns (Please keep in mind that you can be audited by the IRS for no reason up to three years after you filed a tax return. If you omit 25% of your gross income that goes up to 6 years and if you don’t file a tax return at all, there is no statute of limitations.)
Medical Bills and Cancelled Insurance Policies
Records of Selling a House (Documentation for Capital Gains Tax)
Records of Selling a Stock (Documentation for Capital Gains Tax)
Receipts, Cancelled Checks and other Documents that Support Income or a Deduction on your Tax Return (Keep 3 years from the date the return was filed or 2 years from the date the tax was paid — which ever is later)
Annual Investment Statement (Hold onto 3 years after you sell your investment.)
What to keep for 7 years
Records of Satisfied Loans
What to hold while active
Records of Pensions and Retirement Plans
Property Tax Records Disputed Bills (Keep the bill until the dispute is resolved)
Home Improvement Records (Hold for at least 3 years after the due date for the tax return that includes the income or loss on the asset when it’s sold)
Records of Paid Mortgages
*These documents should be kept in a very safe place, like a safety deposit box.
Remember – Don’t throw documents with personal information into the trash. You will want to shred those documents. Check with your bank as they often have shredding services that are offered several times a year. Places such as Staples, Office Depot and the UPS Store also offer shredding services.
Now that you know how long you are expected to retain documents, it’s time to clean out that closet!!