As you ransacked your basement in search of holiday decorations, perhaps you came upon boxes of documents from the last millennium. And then, you probably asked yourself: “Couldn’t I just throw these out?”
Companies and governments often have document retention policies. Most people do not.
Common wisdom suggests we keep important papers for seven years, for reasons that, we vaguely recall, have something to do with taxes.
For those of us with paper records dating to the Clinton Administration, that would seem to mean you can throw them away.
But does that mean everything?
We posed those questions to accountants and tax experts. Here’s what they told us.
Let’s start with the tax return, a near-universal document that fulfills our annual duty to Uncle Sam.
“The IRS can audit you for no reason, or any reason, for three years from the date you filed your return,” said Paul Mendelsohn, a CPA in Livingston, New Jersey.
“The IRS has more time,” beyond the three years, “if you pay late, file an amended return, file a fraudulent return or leave out income that is at least 25% of what you reported,” he said.
The seven-year rule exists, in part, because the IRS “typically has up to six years to audit your return if there’s a big issue, like unreported income,” said Mark Gallegos, a CPA in Chicago. The seventh year “is just a buffer.”
There are cases, though, in which even seven years is not long enough.
Example: There is no time limit for going after people who file a fraudulent tax return, or no return at all.
“If you never filed a tax return, the statute never starts, so you’d have to keep records indefinitely,” said Scott Brillhart, a CPA in Chicago.
Bottom line: Keep your tax returns for at least seven years, if not forever.
Save your tax returns for at least seven years, tax experts say.
The documents you file with your tax return or use to prepare it, including W-2 forms, 1099s, receipts and expense records, “can usually be tossed after seven years,” Gallegos said.
In fact, most of us won’t need the supporting documents for more than three years, Mendelsohn said.
And so, at a minimum, keep those records “for three years from the date you filed your original return, or two years from the date you paid the tax, whichever is later,” he said.
Bottom line: Keep supporting tax documents for at least three years, and ideally for seven.
It’s not hard to fill a box with old bank and credit card statements, pay stubs and other number-intense documents from financial institutions.
Those “can be shredded after a year, unless you are keeping them for tax purposes,” Mendelsohn said.
Michelle Crumm, a certified financial planner and tax expert in Ann Arbor, Michigan, advises clients to keep bank and credit card records for a full seven years.
“Keep a digital copy if you are worried about never having access again,” she said.
Bottom line: Keep bank and credit card statements for at least a year, and arguably for seven.
Here’s an exception to the seven-year rule. Think of it as seven years plus.
If you own a home, or another investment asset, the attendant documents “need to stick around while you own the property,” or the investment, “and for at least seven years after you sell it,” Gallegos said.
The reason: “These records are key for figuring out your cost basis, which impacts how much tax you might owe when you sell,” he said.
Cost basis is the original value of an asset, calculated for tax purposes, according to the financial journalism site Investopedia. That value helps determine the capital gain, which is the difference between the cost basis and the asset’s current market value.
“Safeguard the deed to your house, title to the car, your mortgage,” or car lease or loan, “as long as you own the property,” Mendelsohn said.
Bottom line: Keep property and investment records while you own the assets and, ideally, for seven years after you sell.
The seven years plus rule applies to these documents, as well, Gallegos said.
“Hold on to records for your IRA or 401(k) as long as the account is active and for seven years after it’s closed,” he said. “They’re important for making sure distributions are reported correctly.”
Retirement account distributions (i.e., withdrawals) go on your tax return. Some are taxed; some are not. Either way, you’ll want to keep the records.
Bottom line: Keep retirement account records while the account is open, and for seven years after it’s closed.
Hold on to your Social Security card forever, tax experts advise.
Crumm, the Michigan tax expert, lists several types of records her clients should never throw away. Among them: Adoption papers, birth certificates, death certificates, divorce decrees, lawsuits, marriage certificates, diplomas and school transcripts, health and immunization records, and Social Security cards.
If you have estate or gift tax records, Gallegos says, you should keep them forever.
Some records are redundant. When you receive a new property tax assessment, it’s probably safe to toss the old one, Crumm said.
Other documents you can safely shred when you get a new one: credit reports, Social Security statements and vehicle registrations.
