How long to keep tax records, and which ones

How long you keep a tax document depends on what it proves, not on how old it is. Most records can go after three years, but anything that sets the cost of something you still own stays until long after you sell it.

The clock is the period of limitations

The IRS does not measure record keeping against a calendar. It measures it against the period of limitations for the return a record supports, which is the stretch of time in which you can still amend that return to claim a credit or refund, and in which the IRS can still assess more tax. Whatever backs up an item of income, a deduction or a credit on a return stays until that window closes for that return.

One detail sets where the count begins. A return filed before the due date is treated as filed on the due date, so an early filer's clock starts in April along with everyone else's rather than on the day the return went out. File after the deadline and the count starts from the day you actually filed.

The periods, in plain order

Six periods cover almost everything in the box.

• Three years is the ordinary case, and it applies when none of the situations below do.
• If you put in a claim for a credit or refund after the original return has gone in, two clocks run and the later one wins: three years measured from the day you filed that original return, and two years measured from the day the tax was paid.
• Seven years if the claim is for a loss from worthless securities or for a bad debt deduction.
• Six years if income you should have reported was left off, and the amount left off is more than twenty-five percent of the gross income the return shows.
• No end at all if you did not file a return for the year, or if the return you did file was fraudulent. There is no window to close, so nothing expires.
• At least four years for employment tax records, counted from the date the tax became due or the date it was paid, whichever is later. That reaches anyone who has run payroll, including for a household employee.

Keep every return itself

The returns themselves are the exception to all of this. Keep the copies, because they help you prepare the following year's return and they are what you work from if you ever amend one. For years you cannot find, getting your IRS transcripts is the free route, but a transcript is a summary of the account rather than the return you signed. A complete copy with the attachments is a separate request, on Form 4506.

Property has its own clock

This is where the three-year answer goes wrong. Records tied to property are kept until the period of limitations runs out for the year you dispose of the property, not the year you acquired it. They are what proves depreciation, amortization or depletion along the way, and what fixes the gain or loss when you finally sell. A house bought the year a child was born and sold when that child leaves home means the closing file still matters to a return two decades later.

The same holds through a nontaxable exchange, and there it doubles the filing. Because your basis in what you received is inherited from whatever you handed over, plus any cash you added on top, the old property's paperwork is still doing work years after the old property has gone. Both sets stay until the limitations period closes for the year you dispose of the new property.

The papers that outlive everything

Four groups belong in the permanent file, and each is there because it sets what something cost you.

• A home: the closing statement, and a receipt for every improvement. Improvements raise your basis and shrink the gain on a sale, but only if you can show them. Form 1098 covers the paperwork the closing year generates.
• Investments: purchase confirmations, and the record of dividends reinvested year after year. Each reinvestment bought shares at a price, and that price is basis you have already paid tax on.
• Retirement accounts: any record of contributions you did not deduct. That money was taxed on the way in, and the record is what stops it being taxed again on the way out.
• Business assets: what you paid, when the asset went into service, and the depreciation claimed since. The log that supports a workspace or vehicle deduction belongs with it, as the home office and mileage rules explain.

Digital is fine, and what to check before you shred

A record is only useful if you can still open it and still find it. Scans and downloads do that as well as paper does, provided they live somewhere a lost laptop cannot take them with it, and provided the folder names will still mean something to you in six years.

Then one last check before anything goes in the shredder. A paper that has outlived its tax purpose has not necessarily outlived every purpose it has, and the IRS says as much itself: ask first whether something else needs it. An insurer or a creditor can easily want a document years after the tax window on it has shut.