Welcome to your “2-Minute Money Manager,” a short video feature answering money questions submitted by readers and viewers.
Today’s question is about tax returns — specifically, how long you need to keep returns and assorted supporting paperwork.
Check out the following video to understand how the rules about keeping tax paperwork have changed in recent years.
For more information on this topic, check out “7 Foolproof Tricks to Tame Your Paperwork.”
Got a question of your own? Scroll down past the transcript to find out how to submit it.
Don’t want to watch? Here’s what I said in the video
Hello, everyone, and welcome to your money Q&A of the day. I’m your host, Stacy Johnson, and this answer is brought to you by Money Talks News, serving up the best in personal finance news and advice since 1991.
Our question of the day comes from Robert:
“How long do I keep hard copies of my state and federal tax returns?”
This used to be something I paid a great deal of attention to. But I pay less attention to it now. Why? Because I don’t keep hard copies of my returns or other documents. I scan everything and safely store it in the cloud.
So, while I used to have boxes of files, today I have none. I scan pretty much everything, store it digitally and keep it forever.
And why not? Digital copies don’t take up any physical space. Storing them in the cloud is free, or practically free. My digital copies are easy to find, and when I want to find something within them, they’re easily searchable.
Obviously, there are some documents that need to remain in paper form. For example, you need to hang on to car titles, things with raised seals and papers requiring original signatures, like a will. But the vast majority of the paper you’re sitting on, including your tax returns, can be digitized.
The IRS is fine with digital documents. After all, if you’re filing returns electronically — and most taxpayers do these days — the IRS is not getting paper copies of your return. Why should you keep paper copies?
If you’re not digitizing tax returns, start doing so. Just make sure you store digital files in a safe place that only you can access.
Now, let’s address another question: How long do you have to keep your tax returns, digital or otherwise?
You need to keep a copy of your tax returns forever, in case you need to prove you filed.
As far as the supporting documents for tax returns, typically, you want to keep them for at least three years after the tax return is filed. That’s because the IRS typically can go back three years to audit returns.
While it may seem that three years is the limit, there are documents you’ll want to have much longer.
For example, I’ve owned my house since 2001. When I sell it, if I have a big profit, I might have to pay taxes on part of the gain. To reduce my taxes, I’ll need to show the money I’ve put into the house. So, I’ve kept all the receipts for improvements, some dating back to the first year I owned the house.
I’ll have to continue holding that paperwork for another three years after I sell the house and report the sale on my tax return.
There are other exceptions to the three-year rule for tax returns and supporting documents.
If you underreport your income by 25%, the statute of limitations is doubled to six years. If you filed a fraudulent return, the IRS can go back to the days the dinosaurs roamed the Earth.
But if you’re a typical taxpayer reporting your income and doing things the right way, three years is your answer.
Whatever your situation, though, digitize your documents and store them cheaply and safely in the cloud. Then, you won’t have to worry about them burning up, getting lost, getting eaten by mice or anything else. And you won’t have to worry about how long to keep stuff.
Have a super-profitable day, and meet me right here next time!
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The questions I’m likeliest to answer are those that will interest other readers. In other words, don’t ask for super-specific advice that applies only to you. And if I don’t get to your question, promise not to hate me. I do my best, but I get a lot more questions than I have time to answer.
I founded Money Talks News in 1991. I’m a CPA, and have also earned licenses in stocks, commodities, options principal, mutual funds, life insurance, securities supervisor and real estate.