Financial records are one of those things that can easily overwhelm you if you are not careful. The IRS will require that you be able to produce certain financial records should you ever be audited, so you have to make sure you save the documents you might need if this ever happens — and know where to find them.
At the same time, though, you don’t need to save every single financial record you have ever generated forever. But how do you know which financial documents you need to save and for how long, and which documents you can discard?
From the IRS’s perspective, how long you must hold onto financial records depends on the specific action, expense or event that the records are documenting. As a general rule, the IRS says you should keep records supporting income items and deductions on tax returns until the period of limitations for each return has expired. This period of limitations is defined as the time during which you can amend the return or the IRS can assess additional tax.
Here are some more specific guidelines from the IRS with regard to different periods of limitations:
- You fail to report more than 25 percent of the income you should have reported on your tax return: Keep tax returns and supporting financial records for 7 years. The IRS has up to 6 years to challenge your return in this instance, and since you can file for an extension at the October 15 deadline, you should add one more year.
- You do not file a tax return, or file a fraudulent tax return, in any given year: Keep tax returns and supporting financial records indefinitely.
- You owe additional tax due to good-faith errors: Keep tax returns and supporting financial records for 3 years.
- You file a claim for a credit or refund after filing your original tax return: Keep tax returns and supporting financial records for 3 years from the date you filed the original return or 2 years from the date you paid the tax, whichever is later.
- You file a claim for a worthless securities loss or bad debt deduction: Keep tax returns and supporting financial records for 7 years.
The IRS also recommends that you keep all employment tax records for at least 4 years after the date the tax became due or was paid, whichever is later. In addition, you should keep all records related to any property you have acquired until the period of limitations expires for the year when you dispose of the property in a taxable disposition, according to the IRS.
In addition to these financial record guidelines from the IRS, here are some suggestions regarding how long you should keep some other financial records:
- Brokerage and investment statements — Keep annual statements until you sell the investments, but shred monthly statements when you get new statements each month.
- Bank statements — These generally only need to be kept for one year, unless they are needed to support a tax return. In this case, follow the IRS guidelines above.
- Credit card statements — These usually only need to be kept until you have paid the credit card bill. Again, if they are needed to support a tax return, follow the IRS guidelines above.
- Social Security statements — You can download a new Social Security statement online every year. When you download your new statement, shred your old one.
- Home improvement and purchase records — You should keep these for as long as you own the property. After this, they can usually be discarded.
- Receipts for large items purchased — Hold onto these for as long as you own the item, especially if the item is under warranty.
- Records of non-deductible IRA contributions — These records should be kept indefinitely. After you retire, you may need them to demonstrate that a portion of your withdrawal from the IRA is not tax deductible. You could avoid this recordkeeping necessity by converting traditional IRAs to Roth IRAs.
- Real estate deeds and vehicle titles — These should be kept for as long as you own the property or the vehicle.
- Insurance policies — Keep these for as long as the policies are in force.
- Birth certificates, marriage licenses, military service records and Social Security cards — These should be kept indefinitely.
It is important to devise a system for managing and storing these and other financial records. Storing documents and records electronically by scanning them into a computer and creating PDF files is a popular record storage strategy for many people today.
No single system is going to work for everyone, though, so create a record and document storage system that works best for you and your family. If you are ever audited by the IRS or need important financial documents in the future for some other reason, you will be glad you did.