Individuals often wonder about record retention. The main question people tend to have is “How do I know if I need to keep these?” followed by “How long should I keep them for?” The yearly “file purge” is a sensitive yet smart plan to implement to keep yourself organized through the chaos by disposing of old and unneeded records. However, this can be an issue at times since there can be serious repercussions when records are disposed of and may be needed in the future. This can lead to major issues, both legally and financially. The guidelines below will answer these questions for personal documentation to help you better understand what you should do with your records.
Some Items Should Never be Thrown Out
Certain documents are difficult to replace, and you may be asked to provide them later in life. We suggest storing “permanent records” in an indexed file like a fire safe or safe deposit box (keep electronic copies as well!) Sometimes, making an extra effort to convert these documents into digital format can be a lifesaver. It is simpler than ever to maintain a backup collection of your records. Items that fit this description are:
- Legal documents
- Vital records (birth / death / marriage / divorce / adoption / etc.)
- Income tax returns and proof of payment
- Trust documents
- Retirement and pension records
- Investment trade confirmations and statements that indicate buying and selling
- Important correspondence
- Gift tax returns
Keep Tax Records for at Least 3 Years
How is this length of time determined? The IRS has a “period of limitations” in which you can amend your tax return to claim a credit or refund, or the IRS can assess additional tax. Generally, this is 3 years from the date you filed the return or 2 years from the date you paid the tax, whichever is later. It is important to remember that your state authority might have longer statutes. Keep all tax-related documents, including:
- Copies of filed tax returns
- Bank records and cancelled checks for certain deductions claimed
- Payroll records such as forms W2 or 1099
- Records on sold stocks and bonds and annual forms 1099
- Mortgages/tax bills /deeds/leases on sold property
- Property records/builder contracts/improvement receipts (keep until 3 years after property is sold)
- Proof of health insurance coverage for all family members
The IRS may go back 6 years to audit your tax returns for errors or incorrectly claimed deductions, or if you don’t report all income that you should have, it’s more than 25% of gross income shown on the return.
Business Records for Self-Employed Individuals
In addition to the items listed above, if you are self-employed, look at our Guidelines for Record Retention for Businesses. In general, you should retain such records as:
- Annual financial statements
- Documents substantiating fixed asset additions
- Business mileage logs and related vehicle records
- Payroll records for your employees for a minimum of 4 years after the tax is due or is paid, whichever is later (CT requires 7-year retention)
- Documents related to retirement plans for yourself and your employees
- Organizational documents (state filings, annual reports, etc.)
- Licenses, patents, trademarks, and registration applications
Everyday Paperwork
Anyone is rarely going to want to see a personal electric bill or credit card statement dating back more than a year. In general, it’s OK to shred most bills once they’ve been paid and receipts once you’ve reconciled your bank account. You may choose to keep NON-TAX-RELATED items for up to 3 years for other reasons. For example, your insurance company or creditors may require you to keep these records longer than the IRS does.
Use Caution Disposing of Your Records
In today’s world, identity fraud is a significant problem, and it is necessary to take every precaution to prevent it. Getting your tax documents would be a criminal’s dream come true! It would be best if you disposed of these records by shredding them and not by throwing them away in the garbage. Protect your digital records with passwords or phrases that you can easily remember but that should be hard to guess for others. Don’t forget to wipe electronic records before disposing of old computers, hard drives, and storage devices such as external hard drives, USB drives, and CD-ROMs.
