Money Matter: What Personal Financial Records Should You Keep?
Now that your taxes are filed and you are putting away the tons of paperwork you may have lying around, it’s time to start thinking about what is needed and what can be tossed…or shredded…make sure to shred.
Our friends at Practical Money Skills have a few questions you should ask yourself first before getting rid of that clutter.
- If audited by the IRS, do you have what’s needed to justify deductions, charitable contributions, income, etc?
- Are you tracking stock and fund transactions so when you sell you’ll only be taxed on profits above the purchase amount; also to justify claiming a loss on your taxes.
- Where’s the paperwork for tax credits/deductions for home improvements, such as energy-efficiency upgrades or for medical reasons?
- If you make nondeductible (after-tax) contributions to an IRA or 401(k), are you able to prove you’ve already paid taxes on the amount?
- Do your heirs have what is needed to settle your estate.
You should probably hold onto back-up documentation for seven years, to be safe. These records include:
- W-2 and 1099 income forms.
- Year-end bank and brokerage statements showing interest earned.
- Receipts, cancelled checks or other proof of payment for deducted expenses.
- Home purchase or closing statements, insurance records and receipts for improvements.
- Homeowners, car and medical insurance claim payouts.
- Investment statements (stocks, bonds, mutual funds retirement accounts, etc.)
IRS Form 552 contains detailed instructions on what to save and for how long (www.irs.gov).
Hold onto certain documents for even longer than IRS audit requirements. For example:
- Keep records for investments and major assets at least as long as you own them.
- Save records and tax forms relating to retirement accounts, at least until you’ve drained their balances.
- Toss monthly and quarterly loan statements after receiving year-end summaries, but always retain final payoff notices in case the loan erroneously goes into collection and you need proof.
- Save all tax returns and attachments (Schedules, W-2 form, etc.) indefinitely. The same goes for hard-to-replace personal documents such as birth, marriage and death certificates, divorce, adoption and military discharge papers, will, power of attorney, etc.
You can always save actual documents and receipts. But if your goal is to reduce paper clutter, scan copies and save as PDF files. Back up electronic “soft copies” on an encrypted flash drive or external hard drive in case your computer crashes. And, if you’re worried about fire, theft or other disasters, store additional copies in a safe deposit box or with a trusted friend.
- Take 3 Steps Now To Make Being Audited Later a Piece of Cake [Taxes] (lifehacker.com)
- IRS Tax Tip: Managing Your Tax Records After You Have Filed (bookkeepingmiamiblog.com)