Wondering How Long to Keep Tax Records? This Long.

Photo: Camilo Rueda Lpez, Flickr.

As we all emerge from tax season with file folders of tax-related papers piled here or there, it's natural to wonder how long to keep tax records, and how much we can throw away. You might be surprised to learn that some tax papers should be kept forever, while others vary in terms of how long you should hang on to them.

To start with, it's not a bad idea to hang on to all of your tax returns forever. That's because they contain a handy record of your working life and other aspects of your life, including medical expenses, the expenses related to adopting your child, stocks bought and sold, etc. Old tax returns can be extremely useful if, one day, you're applying for disability insurance, or trying to recreate your work history for some job application. They might help when you're applying for a mortgage, too.

Keep your tax records organized. Photo: mcfarlandmo, Flickr.

It's three years for many recordsWith most records related to your tax returns, such as receipts, canceled checks, bills, credit card statements, records of gambling winnings or losses, alimony records, child care expense records, W-2 forms, 1099 forms, records relating to domestic employees, etc. -- basically, anything related to your income, a deduction, or a credit taken -- you'll want to keep them for the duration of the statute of limitations surrounding your return. The period of limitations is the time during which you can file an amended return and claim a credit or refund. It's also the time during which the IRS can initiate an audit, and charge you for any additional tax dollars. In most cases, that's three years, counted from the filing due date, which is usually April 15.

Note that, beginning with the 2014 tax year, the documents you keep for the three years should include evidence that you carried the minimum required health insurance coverage or qualified for an exemption, along with records of any premium subsidies, lest you get charged a penalty.

If you file an amended return and owe additional taxes, the period in which you should hang on to records gets extended-- to two years from when you paid the additional taxes. And some recommend that self-employed folks hang on to records for at least six years instead of three.

Photo: Got Credit, Flickr.

It's longer than three years for many recordsThe IRS can sometimes want more than three years, though. For example, if the IRS suspects that you failed to report more than 25% of your income, it can take up to six years from the date of filing to initiate an audit. (If you think there might be such an inquiry, or simply to be on the safe side, it wouldn't hurt to keep records for six years, not three.)

If your tax return is not filed at all, or is fraudulent, then there's no statute of limitations, and the IRS can come after you at any time; so if you're unadvisedly in this category, prepare and store records accordingly.

Meanwhile, for the majority of taxpayers filing good-faith returns, certain categories of records should be kept longer than three years:

Keep records of stock and mutual fund purchases, so that you can determine the cost basis of your shares whenever you sell them (as well as the date you bought them). If you hold some investments for decades, which can be a very effective way to build wealth, you'll want to hang on to related documents for all those years. It can be good to keep all brokerage statements, too, even if just electronically, as they will contain information about stock splits, shares received from spin-offs, dividends, and so on.
Keep records of reinvested dividends that you've been taxed on, to avoid being taxed on them when you sell.
Keep records of your non-deductible contributions to traditional IRAs (recorded on Form 8606) until each of the IRAs is drained. They offer evidence of taxes paid, preventing you from being taxed again.
Keep records related to losses from bad debts or worthless securities for seven years, as that's how long the IRS has to look into such losses.
If you're a homeowner, keep records related to your home at least until three or more years after you sell it. You may need to substantiate what improvements or repairs were made in years past, for example. You'll also need a record of the purchase price of the home. Note that home improvements (not repairs) can be added to your home's cost basis, reducing any gain.
With small businesses, some other rules and record-keeping periods can apply. If you own a small business, look into related tax requirements. (For example, the IRS states, "If you have employees, you must keep all your employment tax records for at least four years after the tax becomes due or is paid, whichever is later.")

State taxesThis article is focused on your federal tax returns and related records, but of course, you'll have state tax returns, too. Each state has its own statute of limitations, and some expect you to keep all important records for longer than three years. In California and Arizona, for example, it's four years, not three.

Photo: Steven Depolo, Flickr.

Storing recordsIf the thought of hanging onto so much paper has you irked, remember that you can always digitize some or much of it. You might, for example, scan most of your records and save them as electronic files on your computer as long as you maintain a god organizing system that will let you find and accurately reproduce a hard copy if and when needed. Be sure to have a good back-up plan, though. And take care not to lose the ability to read those files should you change your computer system in the future. After all, we don't know exactly what computers and data storage will look like in 20 or 30 years. Imagine trying to access documents on a 20-year-old floppy disk right now.

Don't discount electronic storage, though, because one advantage it offers is being able to easily make copies and store them in different places. A house fire could wipe out many important records -- not to mention other valuables, of course -- but having stored copies of important papers off-site will make things easier.

Tossing securelyFinally, discard your papers carefully. Be sure to shred anything with important personal information on it, such as your Social Security number or credit card numbers.

However you do it, be sure to keep the documents you need to keep -- for as long as you need to keep them. Store them in an organized fashion, too, because the whole point of storing them is to be able to dig up any information a future audit or inquiry might require.

The article Wondering How Long to Keep Tax Records? This Long. originally appeared on Fool.com.

Longtime Fool specialistSelena Maranjian, whom you can follow on Twitter,has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.