Come tax time, money expert Clark Howard says he always gets questions about how long you should keep tax-related documents.
“When you’re working on your taxes, you’re trying to figure out what can you keep,” he says. “What can you discard? What had you better keep?”
Which Tax Documents Should You Keep and for How Long?
In this article, we’ll discuss how long to keep your tax documents and why, according to Clark.
Clark mostly subscribes to a “rule of sixes” when it comes to keeping tax documents.
“The more complicated your life is, the more things that involve documentation on your return, you keep for six years,” he says.
“What I do want you to keep is proof that you filed each year,” Clark says. “When you file electronically, it’s really easy for you to have proof of filing. And you want to maintain that proof for forever,” pointing out that “the IRS has no limit on when they can say you failed to file, so having a copy of the return is something that is very important.”
“The IRS has three years to go after you on your tax return and requires backup proof of everything you’ve claimed, he adds. “They’ve got six years to go after you and say, ‘Hey you’ve underreported this terribly.’”
Proof of expenses related to home improvement is also worth keeping, Clark says.
“If you own a home you have the ability to sell that home and pocket tax-free as an individual a quarter-million dollars — and for a married couple, $500,000 — of the gain you have on a home,” he adds.
“If somebody has an inspection done of your home and you have to fix this or do this or do that, those are selling expenses that reduce the amount you are taxed,” Clark says. “That documentation is what I want you to keep for six years.
Clark says if you have a business or perhaps own rental property, you should keep anything that documents your investment.
“For your business, I want you to keep that stuff for a long time. Again, six years,” he says.
“I keep full documentation for six years because I do have the complexities that we’re talking about — owning properties, owning a business, I’ve got a lot of footballs in the air — so the documentation is really key,” Clark says.
Another thing that could affect your tax burden is charitable giving. Clark says it’s important that you keep those documents related to donations.
“If you’re a generous soul and you give a lot of money to charity, I want you to keep your documentation for six years,” Clark says.
How To Store Your Important Financial Information
If you’re tech-savvy, you may opt to keep your tax documents safe and sound in an electronic format in the cloud. Here are some free cloud options to choose from:
- Google One: 15 GB
- Microsoft OneDrive: 5 GB
- Apple iCloud: 5 GB for owners of Apple products, 1 GB for everyone else
When it comes to deciding how long you should keep a tax return or related document, at least six years is the magic number, according to Clark.
The reason is that you’ll want to make sure your burden of proof is covered in the case of an IRS audit.
“And anything else in your life, the more complicated your life is, the more things that involved documentation on your return, you keep for six years,” he says.