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What tax records you can toss and what you should keep

Your taxes are done and you're ready to toss a lot of those old documents. Before you do anything, consider this: Some of that paperwork needs to be kept for a few years.

"The IRS generally only has three years past the tax filing deadline to initiate an audit, so a lot of your supporting documents from beyond that time period can get shredded now,” advises Kim Lankford, a contributing editor at Kiplinger's Personal Finance Magazine.

But some documents should be kept for more than three years. If you have a lot of self-employed income, you might want to save your records for seven years. That's because IRS audit period extends to six years for anyone who underreports their income by 25 percent or more.

Any documents relating to the purchase of a house, and any major improvements you’ve made to it, should be kept for three years after the house is sold.

Any records that show when you bought stocks, mutual funds or other investments should be for three years after you sell those investments. You'll need them to determine the capital loss or gain when you sell them.

For those with a business, keep purchase records for any assets that are still being used or depreciated.

And what about the returns themselves, how long should you keep them?

"I also recommend keeping your returns, the 1040 and Schedule C and things like that as long as possible,” Lankford said. “You can now download those, keep them digitally, they don't need to take up a lot of space. That's because there can be all kinds of reasons why you might need them in the future.”

More Info: When to Toss Tax Records

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