Tax returns are a fact of life. Everyone does it and few find the tax filing process enjoyable.
When it comes to best practices around record-keeping and tax document retention, the timeline involved can be confusing and tricky.
Questions like, “how long should I keep my tax returns?” and “how far back can my taxes get audited by the IRS?” are bound to appear at some point.
This is why so many people end up saving documents and papers for years and years, only for them to stay long forgotten, forever collecting dust.
Don’t worry, though — you’re not alone! We’ve all asked the same questions and been in similar predicaments before.
This is why we assembled this article to help you understand basic aspects of tax returns and highlight available solutions to get the job done right.
Read on to learn more about the timelines you should consider for a systematic, hassle-free tax-filing process.
But first, which documents make the list?
Tax documents vary from profession to profession. For example, if you’re a freelancer, chances are you’d have to submit a different set of documents from a salaried person.
But there are a few basics that everyone needs to begin with: your Personal Information, which is your name and a social security number or tax ID number, and Dependent(s) Information (names, social security numbers and dates of birth) for every family member listed on the return.
What follows next can generally be understood as broken down into two buckets: Sources of Income and Types of Deductions.
Where income is concerned, there are supporting documents that are applicable based on the situation you’re in.
For example, Form 1099 is for freelancers who earned more than $600 within a year through a single client. Other examples include Form 1099-G is for people who’ve received government benefits; Form 1099-DIV is if you receive dividend income; Form 1098-E is for student loans; Form 1098 in itself is for mortgages; and Form 5498 is if you’ve put in money in an IRA.
The list for taxable and nontaxable income is extensive, and worth a few clicks to make sure you know where you stand with any revenue streams you may receive.
The same goes for deductions, expenses, and tax credits: the list is also considerable, and you’d only be (figuratively!) setting money on fire if opting not to explore each and every possible tax saving.
When filing — whether paying what you owe or submitting for a refund — other docs and info will likely be necessary: credit card information, bank account, and routing numbers, etc., so the right amount is either sent into the IRS or deposited into your account from the government.
Of course, you can always send returns (and receive refunds) via snail mail and a check. Most people eFile these days, but if you want to use obscure devices like “stamps” and “envelopes,” well, you still can!
Tax brackets and state guidelines
|Tax rate||For single filers||For married individuals filing joint returns||For heads of households|
|10%||$0 to $10,275||$0 to $20,550||$0 to $14,650|
|12%||$10,275 to $41,775||$20,550 to $83,550||$14,650 to $55,900|
|22%||$41,775 to $89,075||$83,550 to $178,150||$55,900 to $89,050|
|24%||$89,075 to $170,050||$178,150 to $340,100||$89,050 to $170,050|
|32%||$170,050 to $215,950||$340,100 to $431,900||$170,050 to $215,950|
|35%||$215,950 to $539,900||$431,900 to $647,850||$215,950 to $539,900|
|37%||$539,900 or more||$647,850 or more||$539,900 or more|
At a very basic level, it goes like this: if you’re below the age of 65, and you earn above $12,550 as a single person or $25,100 as a married person, then you qualify for filing tax returns.
Of course, with a tax code that is 2,600 pages long (and counting), there are many more categories to this.
For example, if you’re a widower or a single person above the age of 65, or you’re a married couple who’s filing taxes separately, or if you’re classified as responsible for special or unique taxes, then different rules apply.
In a similar vein, tax brackets vary according to your gross income as well — they differ between 10% to 37%, and in between are five different tax brackets (seven different tax brackets total).
And the rules for federal tax, state tax, and income tax are different from state to state as well. For example, some states in the US don’t require you to file state returns at all (however, federal returns are still necessary to file).
On one hand, some states instill a flat tax rate, whereas others have a progressive tax system. Your best bet is to check your state guidelines and tax bracket limit before you fill out this year’s tax return forms.
Limitation periods and proper timelines
As a rule of thumb, “you must keep your records that support an item of income, deduction or credit shown on your tax return until the period of limitations for that tax return runs out.”
A back trail of all your documents within the three-year and the seven-year timeframes, respectively, may turn out to be essential.
Let’s break it down further.
Three-year and seven-year rules
Certain periods of limitations with the IRS occur within three-year, seven-year, and forever timeframes.
That is to say, you can be subjected to IRS audits for different reasons; however, each reason would pertain to its applicable time frame.
For example, the normal statute of limitations runs for three years, an understatement of large amounts of money runs for seven years, and foreign assets and income, on the other hand, can run forever.
But of course, there are exceptions in certain cases, and these exceptions will be different for every person.
According to the IRS, you need to keep your documents for a minimum of three years unless:
- You didn’t report the income you should have at one point — in this case, keep records for six years.
- You’ve filed a return deemed fraudulent — keep records indefinitely in this instance.
- You’ve never filed a tax return, or aren’t planning to this year — also keep records indefinitely.
Alongside the above timelines, you need to keep the following in mind as well (quoted from the official IRS website — updated in 2022):
- Keep records for three years from the date you filed your original return or two years from the date you paid the tax, whichever is later, if you file a claim for credit or refund after you file your return.
- Keep records for seven years if you file a claim for a loss from worthless securities or bad debt deduction.
- Keep employment tax records for at least four years after the date that the tax becomes due or is paid, whichever is later.
On the one hand, once the period of limitations expires, you can no longer amend a return (ouch). On the other hand: when that same time period concludes, the IRS is no longer allowed to assess any additional taxes on you. Nice.
It’s worth noting that, although the IRS may not require hard copies of tax returns kept after a certain date, some non-tax purposes indeed might, like an insurance company or creditor.
Here’s the bottom line on timelines: Be sure to double-check before discarding your physical tax documents, and always keep a digital backup just in case.
Saying goodbye to those old tax records — the right way
This should go without saying, but we’ll say it anyway: Dumping your old docs straight into the dustbin is a sure-shot way in which you should never be disposing of your previous tax returns.
Tax documents contain important information like your social security number or tax ID, details about your family, bank statements, and more.
It is always preferred to have a scanned, digital copy of these tax returns.
However, if you plan on disposing of them, make sure you shred them or dispose of them in a safe, responsible way.
And the eternal question: Why do we have to file tax returns anyway?
Every year, there are around 150 million tax returns that are filed in the United States. Aside from the fact that it’s compulsory to do so, what is the logic behind the need of filing tax returns?
To put it simply, the IRS needs to determine how much gross income you make yearly and how much of it — the percentage — you owe in the form of tax.
All of us doing so (collectively paying our taxes) form the primary source of revenue for the federal government.
On an individual level, the same tax documents are also the basis on which the government determines if you are entitled to a tax refund or not.
If you’re a salaried employee, then your employer typically has all the employment tax records for you. If you’re not a salaried employee, then it’s your responsibility to calculate the revenue portion(s) of your tax returns on your own.
Unless you’re a certified financial expert who crunches numbers in their sleep, the chances are you’re just like us: this isn’t your first tax filing rodeo, and you’re well aware that filing tax returns can be pretty stressful.
Once it’s over, then comes the task of understanding how long to keep your tax returns. Every situation is different and, likewise, every answer is different. That’s why PandaDoc is here to help.
With us, you can do the following:
Store your tax forms securely
Safety is key when it comes to filing tax returns. You can never be too careful with your personal information, so you can’t just trust random cloud software to securely store your files.
At PandaDoc, we offer SOC2 Type 1 certification — which means we’re current with all regulated security measures in the financial services domain.
Complete the tax filing process from anywhere
If you live in one part of the world and your tax consultant in another, PandaDoc can help you effortlessly collaborate with them from anywhere — the world is at your fingertips.
File (and sign) forms faster
Our speciality is processing documents and signatures better and faster. Most of the businesses associated with us have reduced their downtime by 80%, thus optimizing their entire process.
Frequently asked questions
Tax filing has its own share of benefits. Here are a few of them: you safeguard your credibility, you get access to your tax refunds, you avoid penalties, and you avoid the risk of losing future refunds from tax returns. Besides, despite the benefits it may or may not offer, filing tax returns is mandatory.
Having to catalog many tax documents, especially all at once, can be pretty daunting. So we suggest instead of having hard copies of each one and overwhelming yourself with the sheer number of forms, it’s best if you keep digital copies.