Tax season might be over, but you might be wondering how long you should hold onto your tax returns and related documents. Before you run to the shredder, read this article and reach out to a tax professional if you have specific questions.
In most cases, you should hold onto prior year tax returns for three years. During this time, the IRS can question items on your return or bill you for additional taxes. You can also elect to amend a prior year return for refunds within this timeframe. While three years is reasonable, remember that if your return omits more than 25% of your income, the IRS can go back up to six years, and there’s no time limit for fraud cases. State tax return retention requirements may vary.
For asset records, always consider whether you might need them later. For real estate owners, keeping records that establish the adjusted basis of your properties is vital. Retain settlement sheets from property purchases and receipts for property improvements. This record-keeping will simplify calculating the adjusted basis of your real estate investments.
For securities transactions, keep purchase documents for taxable mutual funds, stocks, and the like. While investment custodians have improved with their cost basis record keeping, having original purchase documents can save a headache with securities who have a history of stock splits, dividend reinvestments, and nontaxable distributions.
If you’ve made nondeductible IRA contributions or post-tax 401(k) contributions, keep records until three years after you deplete these accounts. File Form 8606 for nondeductible IRA contributions and retain copies of Form 8606 and your 1040s for each year you make such contributions. Hold on to Form 5498 or similar statements reflecting IRA payouts.
For inherited property, you’ll need the value of the asset on the date-of-death, and for gifted property, retain records of the donor’s cost until three years after you sell the asset.
Businesses should hold payroll tax records for at least four years after the due date for filing Form 941 for the fourth quarter of a given year. These records include wage amounts, payment dates, employee data, copies of W-4 forms, and details of tax deposits. Additionally, keep records of tips earned by workers and fringe benefits provided to employees.
If your business deals with assets and depreciation, be prepared to retain those records for decades.
So, before you do a paperwork purge, take a step back and consider that keeping the right records can keep you on the right track. And, as always, reach out to your CPA or tax professional with specific questions.