If you're like most people, you've collected documents over the years that include W-2s, 1099s, letters from charities and other paper items used to prepare a tax return. Some of us are afraid to shred these documents, and for good reason: In an IRS audit, lame excuses won't work, . and they've heard them all.
It's not important to keep all documents, and in fact, keeping too many documents could make it difficult to find what you really need and when you really need it! Here's a look at what you should save and what you can shred:
Tax returns - Save your tax returns and supporting documents for at least three years. That's how long the IRS has to audit you. There are, however, exceptions. The IRS has up to six years to audit you if you under-report your income by a certain percentage. There is no statute of limitations on audits of fraudulent returns. There's also no statute of limitations on audits of taxpayers who don't file a return.
Taxpayers who e-file should print a copy of the e-mail acknowledging receipt of their return and keep it with their records. Those who file paper returns should send them to the IRS via certified mail and keep a copy of the receipt. This will also provide proof that you mailed your return before the deadline.Some experts recommend you keep copies of tax returns forever, because they provide a record of your financial history. You may need previous returns to apply for a mortgage or student loan.
It is recommended by some financial advisors that you never shred the record(s) that shows you actually 'filed' your return. Keep them indefinitely. That includes your state return, too. Keep W-2s, 1099s, acknowledgments from charities and other supporting documents for as long as you keep tax returns in general.
Real estate records - Hold on to your closing statements, purchase and sales invoices, proof of payment and insurance records for at least four years after you sell the property. You should also keep records of any major improvements made to your home, such as an addition or a new roof. When you sell, you can add the cost of these improvements to the amount you paid for your home, which will reduce taxes on capital gains. Still, homeowners who have owned their homes for a long time could exceed those lines. And there's no guarantee tax breaks and other benefits will last.
Investments - As is the case with real estate, you should hold on to documents that show the purchase price of your stocks and mutual funds until four years after you sell. You should also keep records of dividends, reinvested dividends, loads and stock splits. These documents will show the IRS how much you paid for your investments, known as the basis. Without proof of the basis, you could be liable for taxes on the entire proceeds of a sale, even if you sell at a loss. If you claim a loss for worthless securities, hold on to the supporting documents for at least seven years after you file your return. Financial institutions will be required to track the basis for stocks held by their customers starting this year, mutual funds in 2012, and bonds in 2013. They'll also report this info to the IRS.
However, the law doesn't require financial institutions to provide the basis for securities purchased before the effective dates, so you should keep records of securities bought before Jan. 1 (or in the case of mutual funds and bonds, before 2012 and 2013, respectively). Bank and credit card statements. Keep credit card receipts and canceled checks that support your tax deductions on your tax return for as long as you keep the return. Statements that aren't related to your tax returns should be saved for a year then shredded. Canceled checks that aren't related to your taxes can be shredded after you've reconciled them with your bank statement.
Many banks don't send canceled checks to customers. But you can order copies of tax-related checks as soon as you get your bank statement, or keep the statement and order tax-related checks in the event of an audit. In general, banks that don't provide canceled checks must keep copies for seven years, the FDIC says. You may have to pay a fee for copies more than a year old.