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While rummaging through your basement looking for Christmas decorations, you probably came across a box containing documents from the past millennium. And you’ve probably asked yourself: “Maybe we can throw this away?”
Businesses and governments often have document retention policies. Most people don’t.
Conventional wisdom says important documents should be kept for seven years. I vaguely remember the reason, but I think it has to do with taxes.
For those of us who have paper records from the Clinton administration, that would seem to mean we can throw them away.
But does that mean everything?
We asked these questions to accountants and tax professionals. Here’s what they told us:
tax return
Let’s start with your tax return. A tax return is a near-universal document for meeting your annual obligation to Uncle Sam.
Paul Mendelsohn, a certified public accountant in Livingston, N.J., said, “The IRS has three years from the date you file your return to audit them for any reason.”
“The IRS will have more time if you have missed a payment, filed an amended return, filed a fraudulent return, or withheld income of at least 25% of your tax return for more than three years,” he said.
Mark Gallegos, a certified public accountant in Chicago, said one reason the seven-year rule exists is that “the IRS typically has up to six years to audit a return if there’s a major problem, such as underreporting income.” The seventh year is “just a buffer.”
However, even 7 years may not be enough.
For example: There is no time limit to go after people who file fraudulent tax returns or don’t file at all.
“If you never file a tax return, this law never kicks in, so you have to keep records indefinitely,” said Scott Brillhart, a certified public accountant in Chicago.
Bottom line: Keep your tax returns for at least seven years, if not forever.
Tax documents
Documents submitted with or used to prepare a tax return, such as W-2 forms, 1099s, receipts, and expense records, “typically can be thrown away after seven years,” Gallegos says.
In fact, most of us won’t need documentation for more than three years, Mendelsohn says.
As such, these records must be kept for at least “three years from the date the first return is filed or two years from the date the tax is paid, whichever is later,” he said.
Bottom line: Continue to help with your tax documents for at least 3 years, ideally 7 years.
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Bank and credit card statements
It’s not difficult to cram old bank and credit card statements, pay stubs, and tons of other documents from financial institutions into boxes.
These “will be shredded after a year, unless you keep them for tax purposes,” Mendelsohn said.
Michelle Crum, a certified financial planner and tax professional in Ann Arbor, Michigan, advises her clients to keep bank and credit card records for a full seven years.
“If you’re worried about never being able to access it again, keep a digital copy,” she said.
Bottom line: Keep your bank account and credit card statements for at least one year, and probably seven.
Real estate and investment records
This is an exception to the seven-year rule. Expect it to take more than 7 years.
If you own a home or other investment property, Gallegos said, the accompanying documentation “should be retained while you own the property or investment and for at least seven years after you sell it.”
Here’s why: “These records are key to understanding your cost basis and impact the amount of tax you pay at the time of sale,” he said.
According to financial journalism site Investopedia, cost basis is the original value of an asset calculated for tax purposes. This value helps determine the capital gain, which is the difference between the cost basis and the current market value of the asset.
“As long as you own the property, protect your home deed, car title, mortgage, or car lease or loan,” Mendelsohn said.
Bottom line: Keep property and investment records while you own the property, ideally for seven years after you sell it.
Retirement account records
Gallegos said the seven-year rule also applies to these documents.
“Keep your IRA or 401(k) records for seven years after closure, as long as the account remains active,” he said. “These are important to ensure that distribution is reported correctly.”
Distributions (or withdrawals) to retirement accounts are reported on your tax return. Some items are taxable. Some people don’t. In any case, you want to keep records.
Bottom line: Keep your retirement account records during account opening and for seven years after account closure.
Other “permanent” documents
Crum, the Michigan tax expert, points to several types of records that clients should never throw away. This includes adoption documents, birth certificates, death certificates, divorce decrees, lawsuits, marriage certificates, diplomas and school transcripts, health and immunization records, Social Security cards, and more.
If you have estate or gift tax records, Gallegos says you should keep them forever.
Documents to keep until new documents arrive
Some records are redundant. Once you receive your new property tax assessment, it’s probably safe to throw away your old assessment, Crum said.
Other documents that can be safely shredded when acquiring new documents: credit reports, social security statements, vehicle registrations, etc.
something else
Mendelsohn says if you have an older document not listed above, it’s probably safe according to the seven-year rule.
There are exceptions. If you run a business and fail to file a tax return or get sued, you may wish you had all the relevant documents.
If not, you can probably go.
