Once you've filed your tax return, you probably don’t feel like keeping all the paperwork, including your W-2, 1099s, and others. It's probably fair to say that you don't even want to think about your taxes at all. But don't go throwing them out as soon as your mailed your tax return or hit send on your electronic forms.
In fact, there are some documents you'll want to (and should) retain indefinitely. Making a practice of keeping papers you’ll need for the future will pay off in tax savings later on. Here is a rundown of those documents and why you should keep them.
- Don't throw away all of your paperwork after you've filed your tax returns.
- The IRS requires you to keep important documents for up to three years after you file your return.
- Retain paperwork related to home expenses, such as abstract, legal, and title insurance fees.
- Keep records related to other property like stocks and artwork.
- If you inherit property, keep any calculations made to determine the value of the estate from the time of the person's death.
Copies of Returns
The Internal Revenue Service (IRS) has a limited time in which to audit returns. This time period is generally three years from the date you filed your return. Keep in mind, though, that this time frame doesn't apply if the agency thinks you didn't file a return. If you get a notice saying you never filed, it's up to you to prove otherwise.
In order to prove your case, you have to retain a copy of your return along with proof of filing. In fact, the law requires you to hold on to the documentation. The type of proof depends on how you filed your return:
- If you filed a paper return, you should keep a registered or certified receipt. Or, you can keep the slip from a private delivery carrier, such as FedEx or UPS.
- For anyone who files electronic returns, the IRS accepts the email acknowledging your return was accepted for filing. You'll get an email from the provider if you use software (like TurboTax) to file. If you use a paid preparer, ask them for an acknowledgment that your return was accepted.
The same is true for state income tax returns. Keep a copy of the state income tax return forever, along with proof of filing.
Documents for Your Home
A personal residence is the largest single asset for many people. It's also one that can generate a sizable tax bill when sold. The tax law allows up to $250,000 of gain on the sale of a principal residence ($500,000 for joint filers) if certain conditions are met. But you end up with a taxable gain if you don't meet these conditions or if the gain exceeds the dollar limit.
In order to minimize gain, maximize the basis of the home. Basis, which starts with what you paid for the home, can be increased by capital improvements, such as an addition, a new roof, appliances, an in-ground swimming pool, and landscaping. The longer you own the home, the more likely that:
- The price you get when you sell will be higher than what you paid
- You’ve put more money into the home for improvements
In addition to home improvements, retain your initial settlement statement and other papers related to the purchase. This enables you to add the following to your cost basis:
- Abstract or abstract of title fees
- Charges for installing utility services
- Legal fees, including fees for a title search, sales contract, and deed
- Recording fees
- Survey fees
- Title insurance
- Transfer or stamp taxes
Keep a record of these expenses for as long as you own your home and then for at least three years after you file your return reporting the sale. The three-year period in most cases is the time in which the IRS can question your position.
Find a list of capital improvements for which you should save receipts or other proof of payment in IRS Publication 523.
Acquisition Costs for Property
Just like home improvements, you want to keep records related to other property, such as stocks, your vacation home, rental property, or artwork.
Remember, you need to know what you paid for the property, including commissions and other acquisition costs. This allows you to properly determine any gains when you sell. If you don't, you may have to pay more in taxes than what would otherwise be due. Keep in mind that it’s up to you to prove your tax basis if the IRS ever challenges your return.
As in the case of records related to your home, keep these records for as long as you own the property and then for at least three years after you file your return reporting the sale of the property.
Brokerage firms and mutual fund companies are now required to provide cost basis information on certain securities, such as stocks acquired from them since 2011. But it’s still wise for you to retain this information in case you change firms or firms merge and your records are lost, which can certainly happen.
When you inherit property, your tax basis becomes the value of the property on the date of the death of the person who left it to you. This is called the stepped-up basis.
Large estates—those valued at over $12.06 million for those dying in 2022, or valued at over $12.02 million for those dying in 2023—report the value on Form 706 of their federal tax returns. Smaller estates may have to report the value of the property on state death tax forms even if no federal return is due. You can get more information about your tax liability from the executor, administrator, or personal representative.
The heirs are responsible to determine the value of any estates that aren't required to file such returns. As such, this value becomes the basis of the property. Make sure you get the values of any publicly-traded securities and an appraisal for any real estate that you inherit for the date of death so you can demonstrate your basis in the future.
As with other property, retain this information for as long as you own the property, plus the period in which the IRS can question your report of a sale.
The Bottom Line
Record-keeping may seem tedious and cumbersome. Create a record-keeping system that works for you. Simplify your papers by creating an electronic record by scanning documents you want to keep and retaining them in a file on your laptop, on a flash drive, or in the cloud.
Keeping copies of your key records in the cloud and/or at some other location is an important safeguard since laptops and flash drives can crash or be lost. And even with electronic records, file the paper ones as well, just in case. It could save you a lot of trouble if you or your heirs need them in the future.