In the modern age of e-filing taxes and electronic processing of W-2s and other tax forms, most people never actually send in their tax documentation to the IRS with their tax returns. However, it's extremely important that you don't simply throw out the documents you use to prepare your tax return right after you submit it. In fact, you should keep all of the documentation relevant to your tax return for years after you file.
Here's how long to save your tax records
The short, and general, answer is that you should keep your tax records for three years. This is the IRS' standard time limit for assessing additional taxes or requesting verification of the information in your return.
Having said that, there are some notable exceptions:
- If your tax return has a claim for a loss resulting from a worthless security or bad debt, save your documentation for seven years.
- If you have unreported income in excess of 25% of the amount of gross income shown on your return, the time limit is six years. This one is tricky, because it can be enforced regardless of whether you knew you were supposed to report the income or not.
- If you don't file a return at all, you should save your records indefinitely. To be clear, there are some perfectly valid reasons for not filing. However, the IRS could potentially question your decision to not file at any time.
- If you filed a fraudulent return (not that anyone reading this did), you should also keep your tax documents indefinitely. However, if you intentionally commit tax fraud, a missing W-2 will likely be among the least of your worries.
What documents should you keep?
There are some obvious things you should hang on to, including everything you get in the mail labeled "Important: Tax Document Enclosed." This includes W-2s, 1099 forms, brokerage tax forms, and college tuition statements, just to name a few. In addition, here are some other documents that might be relevant to your tax return:
- Any records showing money going into or out of retirement accounts. Brokerage statements and 1099-Rs are usually sufficient, but cancelled checks and bank statements can also be helpful.
- Records of charitable donations
- Receipts for medical expenses, if the total is greater than 10% of your AGI
- Mortgage interest statements
- Property tax receipts
- Receipts and records for any other deductible items, such as job search expenses, moving expenses, and unreimbursed business expenses
- Business-related receipts if you're self-employed
- Documentation of your child care costs
- Tuition and fee documentation, as well as proof of other deductible expenses such as required lab equipment and textbooks. The American Opportunity Credit allows expenses like books to be deducted, while the other education tax breaks don't unless purchased directly from the educational institution, so be sure to keep the appropriate documentation for the tax break you claim.
- Documents proving that a marriage, divorce, or birth/adoption of a child took place within the tax year in question
Also, be sure to keep a copy of your completed tax return handy. Not only can this be helpful in the event of an audit, but there are several other life situations where a tax return can be useful for income documentation, such as when you're buying a home.
As a final thought, when it comes to protecting yourself from tax trouble, it's better to overprepare. So, if you come across a certain piece of documentation and you're not sure if it's important to save or not, throw it in your tax documentation file. A little extra clutter is certainly less of a problem than getting audited by the IRS and not having the one piece of documentation that could easily clear up the situation.