Whether you tend you use the standard deduction or are a big itemizer, there are many financial documents you need to keep. Generally, the IRS requires that you keep all your important tax-related documents for three years, in case of an audit. But in certain cases, and notably, if the IRS finds you have neglected to report 25% or more of your income, you will need to make sure you keep your documents for six years. And in cases of major fraud like failure to file, there is no time limit on when you can be audited. So if you fail to file correctly, either intentionally or unintentionally, you may need to keep certain documents on hand indefinitely.
The Documents You Need To Keep
If you file any deductible expenses on your tax return, you need to keep records of them. Deductible expenses can include charitable donations, itemized business meals, medical expenses, and more.
If you buy any stocks or mutual funds, you should keep a record of the purchase. Additionally, you’ll need to keep a record of any stocks or mutual funds you sell.
The reason you need to save these investment records is to accurately calculate capital gains and losses, which must be claimed on your tax return. Even if your brokerage firm keeps records of your investment transactions, you should always keep your own records as a back up in case of any unintentional information loss on the firm’s part.
If you have any major loans, like student loans or mortgages, you should keep a record of them in case you should need to provide them to the IRS.
Records of Income
Keeping records of your income is relatively simple for those who are traditionally employed but can be more complicated for business owners and self-employed individuals. Be sure to keep all your invoices and received checks from business and self-employment income on hand.
If you make any regular payments, such as those for child support or alimony, keep a record of your payments in case you should need to prove you made them at a later date.
Home Improvement Receipts
If you are a homeowner, it’s important to keep track of any home improvement related expenses. Keeping track of these receipts is important should the value of your home go up drastically.
Birth Certificates and Social Security Cards
While birth certificates and social security cards are not necessarily financial documents, they are sometimes requested by the IRS, so you should make sure to keep careful track of them.
Digital Vs Physical Records
If you prefer, you can keep only physical records of your financial documents. But, today, the IRS also accepts digital scans of physical documents, and will not request originals in place of the digital copies. But if you do decide to transfer to digital records, be sure to store them in more than one place. Hard drives can crash or be corrupted, leading to data loss. So it’s best to hedge your bets and have multiple copies of your important digital records across various devices or external drives.