In the last blog, we shared information on the statute of limitations and how long financial documents should be retained. To read this information, see (http://bit.ly/2pBkL6z). Today’s blog shares details on what paperwork may need special attention, and what can safely be destroyed.
Occasionally, you’ll have documentation to support transactions that will be reported on future tax returns. Records that may need special attention include:
- Consider retaining your IRA records – including Roth contributions – until you withdraw all of the money from your account.
- If you buy capital assets like stocks, bonds, or real estate, you’ll want to keep records which support basis (typically your purchase price plus any adjustments) for as long as you own the property plus three years.
- If you claim depreciation, amortization, or depletion deductions for certain assets including land or real estate, you’ll want to keep related records for as long as you own the underlying property plus three years.
- If you claim special tax deductions and tax credits, you may need to keep your records longer than normal (for example, if you file a claim for a loss from worthless securities or bad debt deduction, you should keep those records for seven years).
- If you claim any other special tax benefits, a good rule of thumb is to keep your records for as long as the tax benefit runs plus three years.
To save space (and quite possibly, your sanity), you can scan your records and store them electronically. The IRS has accepted scanned receipts since 1997, a policy that was memorialized by Rev. Proc. 97–22 (downloads as a pdf). Your scanned or electronic receipts must be as accurate as your paper records and you must be able to index, store, preserve, retrieve, and reproduce the records if asked. In other words, you need to have your records organized and be able to produce them in a hard copy form if needed.
Wondering what you can safely toss? Consider:
- Duplicates of receipts.
- Records that are unrelated to deductions and credits not claimed. One of the biggest offenders? Medical receipts when you don’t actually claim the medical expenses deduction. Ditto for charitable gifts when you don’t claim the deduction. You don’t need to keep those receipts for tax purposes.
- Old tax returns. Some tax professionals recommend that you never throw out your old tax returns – even when the statute of limitations has already run – as proof that you’ve filed. I don’t think that’s necessary. I started working at age 14. I don’t want to die with a filing cabinet filled with 50+ years of tax returns so I toss mine after the statute runs. Find your own level of comfort.
- Paycheck stubs. At the beginning of each new year, check your paycheck stubs against your prior year-end statements, including your form W-2 and your annual Social Security statement. Make sure that they properly reflect your income, pre-tax deductions, employee benefits, and the like. Once you’ve confirmed that they’re correct, you don’t need to save the stubs.
- Old tax-related records. If the statute of limitations has run, you can generally destroy tax-related records (though keep in mind there may be other non-tax related reasons for holding onto some records, such a paid-off mortgage statement).
When you’re ready to toss your old records, have a shredder handy. Don’t simply throw them into the recycling bin or trash can: your records have personally identifying information, as well as details about your finances, that you want to keep private and away from potential identity thieves.
This information was written by Kelly Phillips. She attended law school and interned at the estates attorney division of the IRS. She has written many tax-related articles and two books while also she running her own website Taxgirl.com. She currently is working full time as a Senior Editor for Forbes.com.
