Breaking the Code: Tax Record Retention
By: Chris Archambault, MBA, CFP®
As clients move, clean out, or generally inquire about what they need to keep on hand, one question we receive quite often is, “how long should I keep my tax documents?” While it may depend on a taxpayer’s individual situation and, in many cases, different types of tax records, the below is a general rule of thumb on maintaining records:
Three Years: In most cases, the IRS generally has three years from the later of the due date of your return (for individuals, April 15) or when the return is actually filed to initiate an audit. It is recommended that you keep all supporting documentation at least three years from filing a return (i.e. W-2’s, 1099’s, support for deductions: charitable contributions, mortgage interest, real estate taxes etc.)
Six Years: The three-year statue is extended to six years if there is under reporting of income by 25% or more. For those who derive the majority of their income as a W-2 employee, this likely is not as applicable. If you are self-employed and receive multiple 1099-MISC or compensation from multiple sources, it may be easier to make an error underreporting and it is suggested to keep records for 6 years from filing to prove there is no under reporting.
Seven Years: If you claim a loss from a bad debt or a worthless security, there is a seven-year time horizon and it is recommended to keep for seven years from filing.
Ten Years: For foreign tax credits / deductions claimed (i.e. you paid taxes to a foreign government on income), there is a ten-year period over which you can change your mind on whether you claim a credit or deduction. For most, a foreign tax credit is most advantageous on foreign investment income from brokerage accounts. The ten-year time horizon is most applicable to those who have significant foreign income or foreign earned income.
Asset Specific Records:
Retirement Accounts: For a Roth or Non-Deductible IRA, you should keep the records of contributions indefinitely until 3 years after the account is depleted to prove basis.
Real Estate: For any real estate (personal or rental), you should maintain all records (purchase documents + improvement records) to establish the basis and maintain these records until three years after the property is sold
Gifted & Inherited Assets: For gifted assets, your basis is that of the donor’s basis and you should maintain these records. For inherited assets, the basis will generally be the FMV on the date of death of the donor and should maintain proper record of this.
Tax Returns: While this article refers to tax records & supporting documentation, as a general rule of thumb, it is a good idea to maintain records of your tax returns indefinitely (as many times there are also non-tax purposes for the returns; for example, a bank may require prior returns to obtain financing, etc.)
To ensure compliance with the requirements imposed on us by IRS Circular 230, we inform you that any tax advice contained in this communication (including any attachments) is not intended to and cannot be used for the purpose of: (i) avoiding tax-related penalties under the Internal Revenue Code, or (ii) promoting, marketing or recommending to another party any tax-related matter(s) addressed herein.