Tax Documents to Keep

What Tax Records & Documents Should I Keep?

Some Things You Need to Keep Forever

1.  Personal documents such as birth certificates, social security cards, marriage certificates, divorce and property settlement documents, military discharge papers, estate tax returns, insurance policies, wills, and trust documents should be kept in a bank safe deposit box or a fireproof safe.  Keep copies at home for quick reference. 

2.  Business documents concerning the formation, operation, and termination of a business (corporation, LLC, or partnership) should be kept indefinitely, since questions / lawsuits often arise years after the company no longer exists.

3.  Copies of all of tax returns and proof of payment (both personal and business) should be kept forever.  The government occasionally pops up and says that someone failed to file a tax return quite a while back.  I've seen them reach back 12 years!  Because you are only keeping the actual tax return and proof of payment, you can probably fit a whole decade into a single file folder.  I like to keep both a paper copy and an electronic copy of each tax return.

Some Records You Need to Keep Indefinitely

1.  Closing escrow statements (the HUD-1 statements) from the purchase and all refinances of your home and other real estate should be kept until 5 years after you sell the property.  Also, bills, canceled checks, and credit card statements for the cost of all improvements to the property should be kept until 5 years after the property is sold.

2.  Stock brokers' statements showing the purchase date and price for all stocks and other securities you own should be kept until 5 years after they are sold.  If you reinvest dividends, keep those records, too, since the reinvestments will be added to your cost and reduce the amount of taxable profit.  If you have stock options or ESPP stock, keep track of the amounts you invest.  Often, when a company goes through a merger, these records are lost, so you cannot depend on the company to provide this information when you sell your stock.

3.  Documentation for all deposits to IRAs, Roth IRAs, and SEP-IRAs should be kept until the accounts are exhausted.  If you made nondeductible contributions to a traditional IRA, be very careful to hang on to documentation.  The funds will be nontaxable when withdrawn (by you or your heirs) but only if you can show that you received no tax deduction when contributed.

4.  This is very important:  If you are carrying capital losses or rental losses from prior years, you must keep all of the documentation all the way back to the beginning of the unused capital losses or rental losses!

Everything else can be shredded after 5 years.

Why 5 years?  The IRS has 3 years from the date a tax return is filed to audit that return.  The California FTB has 4 years.  This can be extended to 6 years if you've failed to declare a substantial chunk of your income.  And it's extended forever if you've filed a fraudulent tax return or no tax return at all. 

One last thing:  The Social Security Administration no longer sends out periodic statements of your account.  It's a good idea to go to their website once in a while to check that no earnings are missing.

If you have questions / comments or would like to enlist the tax services of an experienced CPA tax accountant, please contact me.

M. Bess Kane, CPA

November, 2020