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Which Tax Documents Do I Need to Keep?

Making sure you have the necessary papers or electronics records is important.

By Dan Caplinger

Preparing your tax returns is an ordeal for millions of Americans. Yet even after you’ve finished your returns, you also need to know which records you should hold onto just in case the IRS comes back to you with questions. Below, we’ll take a look at the rules governing documentation and which tax documents you should keep.

Documents you used to prepare your tax return

In general, the most important tax documents to keep are the ones that you used to justify the numbers on your final tax returns. The most common of those documents is your Form W-2, which shows your job income along with a record of taxes withheld from your paychecks. The W-2 is important because for most people, it has the bulk of their taxable income, and it also represents the lion’s share of the money that goes to the IRS on your behalf to cover your income tax liability.

For investors, 1099 forms have most of the information you’ll need, including records of interest received, dividend income, and the basis and sales proceeds from investments that you’ve sold so that you can calculate your taxable capital gain or loss. Brokerage statements can also confirm these items, as well as contributions to IRAs and other retirement plans.

On the deduction side, you’ll want to hang onto forms you used to justify deductible expenses. Form 1098 is the most common, relating to home mortgage interest. But other records, such as payments for state and local real estate taxes or documentation of charitable donations, can also be valuable to prove to the IRS that you deserved all the deductions you claimed.

One of the newer requirements related to your taxes is related to the Affordable Care Act. In order to avoid a penalty, you need to establish that you had creditable health insurance coverage or qualified for an exemption. Keeping the records that prove your coverage with your tax records will ensure that if the IRS challenges your decision not to pay a penalty, you can establish why.

Finally, keeping your tax returns as filed can be extremely valuable in the future. By doing so, you can prove that you haven’t taken inconsistent positions in future years, and that can save you a lot of trouble if the IRS questions your handling of various income items over the years.

How long should you hang onto your records?

The length of time you need to keep these tax documents depends on the nature of the document. The key question is how long the IRS will have to challenge you on the figures that each document contains.

For most tax returns, the statute of limitations is three years from the due date of the return or the filing date, whichever comes later. Therefore, many of the supporting documents that went toward preparing the return are no longer necessary once that time has run, because the IRS can’t come back and make a challenge.

However, there are different statutes of limitations that apply in different situations. If you underreport your income by at least 25%, then the IRS can audit the return up to six years after the date of filing. Cases involving fraud don’t have any statute of limitations, so you’ll need to hold onto your records indefinitely if you fear that the IRS might allege you’ve taken a fraudulent position on your return.

In addition, you should hold onto some records for longer simply because of the nature of the record itself. For instance, with records of investment purchases and sales, keeping statements that document the gains and losses you claimed can be valuable not just now but for future investments as well. Especially in situations in which you make repeated investments in a particular stock or fund, such as with a dividend reinvestment plan or automatic investments in a mutual fund, the complexities of dealing with tax basis make it extremely useful to keep your own records of which shares you sold at what time.

Be smart with your tax documents

Holding onto paper records can be a hassle, and ensuring that you keep access to electronic records can be even more challenging. It’s generally safer to keep all your tax documents, but by knowing for certain which documents you’ll absolutely need and which are arguably less important, you can use your judgment to decide the best course of action for your situation.

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Drew Limsky

Drew Limsky

Editor-in-Chief

BIOGRAPHY

Drew Limsky joined Lifestyle Media Group in August 2020 as Editor-in-Chief of South Florida Business & Wealth. His first issue of SFBW, October 2020, heralded a reimagined structure, with new content categories and a slew of fresh visual themes. “As sort of a cross between Forbes and Robb Report, with a dash of GQ and Vogue,” Limsky says, “SFBW reflects South Florida’s increasingly sophisticated and dynamic business and cultural landscape.”

Limsky, an avid traveler, swimmer and film buff who holds a law degree and Ph.D. from New York University, likes to say, “I’m a doctor, but I can’t operate—except on your brand.” He wrote his dissertation on the nonfiction work of Joan Didion. Prior to that, Limsky received his B.A. in English, summa cum laude, from Emory University and earned his M.A. in literature at American University in connection with a Masters Scholar Award fellowship.

Limsky came to SFBW at the apex of a storied career in journalism and publishing that includes six previous lead editorial roles, including for some of the world’s best-known brands. He served as global editor-in-chief of Lexus magazine, founding editor-in-chief of custom lifestyle magazines for Cadillac and Holland America Line, and was the founding editor-in-chief of Modern Luxury Interiors South Florida. He also was the executive editor for B2B magazines for Acura and Honda Financial Services, and he served as travel editor for Conde Nast. Magazines under Limsky’s editorship have garnered more than 75 industry awards.

He has also written for many of the country’s top newspapers and magazines, including The New York Times, Washington Post, Los Angeles Times, Miami Herald, Boston Globe, USA Today, Worth, Robb Report, Afar, Time Out New York, National Geographic Traveler, Men’s Journal, Ritz-Carlton, Elite Traveler, Florida Design, Metropolis and Architectural Digest Mexico. His other clients have included Four Seasons, Acqualina Resort & Residences, Yahoo!, American Airlines, Wynn, Douglas Elliman and Corcoran. As an adjunct assistant professor, Limsky has taught journalism, film and creative writing at the City University of New York, Pace University, American University and other colleges.