Which Tax Documents Should You Keep and for How Long?

Now that tax time has come and gone, you may be wondering what to do with all of the legal documents, receipts and business papers you've accumulated over the past 12 months, especially your tax documents.

"When you're working on your taxes, you're trying to figure out what can you keep," money expert Clark Howard says. "What can you discard? What had you better keep?"

In this article, we'll discuss how long to keep your tax documents and why, according to Clark.

Clark mostly subscribes to a "rule of sixes" when it comes to keeping tax documents.

"The more complicated your life is, the more things that involve documentation on your return, you keep for six years," he says.

Tax Returns

"The IRS has three years to go after you on your tax return and requires backup proof of everything you've claimed," Clark explains. If the IRS discovers substantial errors during an audit, they could ask for records up to six years back. "They've got six years to go after you and say, 'Hey you've underreported this terribly.'"

So Clark's general rule is to keep all tax documents for six years to be on the safe side.

However, there is one thing that Clark wants you to keep forever: your actual tax return so you have proof of filing. Clark explains that "the IRS has no limit on when they can say you failed to file, so having a copy of the return is something that is very important."

Home-Related Documentation

Proof of expenses related to home improvement is also worth keeping, Clark says.

"If you own a home, you have the ability to sell that home and pocket tax-free as an individual a quarter-million dollars - and for a married couple, $500,000 - of the gain you have on a home," he adds.

However, in rare instances where your gain is more than this, you can still reduce the amount of tax you pay by keeping track of your capital improvements. You would want to create a file of these home improvements and receipts and then hang on to these until you sell your home and then for six years following tax years.

"If somebody has an inspection done of your home and you have to fix this or do this or do that, those are selling expenses that reduce the amount you are taxed. That documentation is what I want you to keep for six years," Clark says.

Business-Related Documentation

Clark says if you have a business or perhaps own rental property, you should keep anything that documents your investment.

"For your business, I want you to keep that stuff for a long time. Again, six years," he says.

"I keep full documentation for six years because I do have the complexities that we're talking about - owning properties, owning a business, I've got a lot of footballs in the air - so the documentation is really key," Clark says.

Another thing that could affect your tax burden is charitable giving. Clark says it's important that you keep those documents related to donations.

"If you're a generous soul and you give a lot of money to charity, I want you to keep your documentation for six years," Clark says.

How to Store Your Important Financial Information

If you're tech-savvy, you may opt to keep your tax documents safe and sound in an electronic format in the cloud. Here are some free cloud options to choose from:

• Google One: 15 GB

• Microsoft OneDrive: 5 GB

• Apple iCloud: 5 GB for owners of Apple products, 1 GB for everyone else

Bottom Line

When it comes to deciding how long you should keep a tax return or related document, at least six years is the magic number, according to Clark.

The reason is that you'll want to make sure your burden of proof is covered in the case of an IRS audit.

"And anything else in your life, the more complicated your life is, the more things that involved documentation on your return, you keep for six years," he says.

Clark Howard is a consumer advocate who focuses on saving more, spending less and avoiding getting ripped off. In addition to a nationally syndicated radio show, his website http://www.clark.com features articles and advice as well as podcasts and videos.