This article was last updated on May 4
Like me I am sure you get tons of bills and statements in the mail or delivered electronically. Most times you just action and then toss them. But you may in fact be creating legal or tax issues by not keeping certain documents. Where possible you should try and retain a hard copy and electronic version (scanned and stored in an external USB or hard drive) of all the relevant documents listed below.
Tax Records – Business and Personal (7 years)
The IRS only requires 3 years of tax records if you are audited. But if they find you are under-reporting your income (i.e. you owe taxes) they can request up to 7 years of tax records. However, where the IRS suspects fraudulent or missing returns, there is no limit on how far they can go back.
Keep records for 3 years from the date you filed your original return or 2 years from the date you paid the tax, whichever is later, if you file a claim for credit or refund after you file your return. Keep records for 7 years if you file a claim for a loss from worthless securities or bad debt deduction. (IRS.gov)
So to play it safe, and assuming most people are not tax fraudsters, keep all your tax related records for 7 years. I use old shoe boxes stored in my basement to keep tax records related to a certain year. Since I also have business related taxes, I keep an extra “shoebox” for business related tax records. I also keep electronic copies of the actual tax returns and key W2 documents.
Legal and Identification Documents – Birth Certificates, Passports, Social Security cards etc (Keep forever)
Needless to say these documents legally establish who you are and in today’s world where you must prove your identity in any financial or legal transaction – keeping these documents safe is key. In addition to the hard copy version of all these documents, I keep a scanned copy of these on a local USB stick and have burned copies to a CD that I keep at my parents house. Do not store these documents online, or you may become a victim of identity theft if your online accounts or PC are compromised
Home Improvement Records (7 years after sale of the house for tax purposes)
Keep records of substantive improvements made to your house – like adding a deck or new kitchen remodel. The reason is tax related because the cost of improvements can be added to the original purchase price of the house and lower the taxable gain on a house when it is sold. This article details the criteria for capital gains/losses you can exclude from selling a house – $250,000 for singles or $500,000 if married
Utility Bills (1 year)
These are worth keep if you have disputes with your utility company or are planning to sell your house. Buyers like to see a year of records to get an idea of utility costs through summer and winter. The best way to keep this is save or scan your online utility documents to a PDF or Word file.
Investment Statements and Retirement account details (Up to 7 years)
The key statements to keep are the quarterly and yearly summaries. Also when you buy and sell securities keep an electronic record of the transaction or trade note (from your broker) so that you can figure your cost basis and associated capital gains or losses. Also if you are claiming a big capital loss or gain, you need to keep the documents as evidence for tax reasons which means holding on to it for up to seven years
Medical Records, Benefit Receipts and Explanation of benefit statements (7 years for claimed deductions, 1 year otherwise for insurance claim verification)
Keep receipts for medical expenses throughout the year in case your insurance company or FSA provider requests proof of visit or verification of medical claims. You can also deduct medical expenses that exceed 10 percent of adjusted gross income. If you meet this threshold and plan to take the deduction you will have to keep the medical receipts as tax records