For those who want to be extra cautious about retaining financial records, here are specific reasons why you should keep your actual tax returns even if the statute of limitations has expired. And what exactly are the statutes of limitations which are relevant?
Supporting documents, such as 1099’s, W-2’s, receipts for charitable contributions, etc. should be kept for 3 years after the return was filed or the due date, whichever is later. For example, the documents for your 2011 return filed March 1, 2012 should be retained until April 15, 2015. Note that if your 1099 is attached to a brokerage statement that shows evidence of the purchase cost of a financial asset it’s critical to hold onto the statement until you dispose of that asset.
As for the tax returns themselves, it’s a good idea to save them forever. They may be needed for Medicaid, immigration, pension, divorce and other purposes. They may also contain useful data in filing future returns. At a minimum we recommend retaining them for 10 years. Certain items on a tax return affect later years and need to be kept until the statutes of those later years’ tax returns expire. For example:
- basis of depreciable property i.e. rental property or portion of home rented out or used for business
- Section 1231 losses
- elections to capitalize real estate tax and other carrying costs
- amounts of IRA and pension contributions that were not deductible for NJ
Statute of Limitations Summary – Individuals
3 year – This is the general statute of limitations on IRS assessments. It begins to run the later of the due date of the return and the actual filing date.
6 year – Omissions of more than 25% of gross income are subject to a 6 year statute
10 year – This is the time the IRS has to collect (as opposed to assess) tax due.
Unlimited – There is no statute of limitations for fraud and for non-filers.
So the expression, “when in doubt, throw it out” may be suitable when cleaning out your clothes closet. But when cleaning out tax records, “when in doubt, don’t throw it out.”