Whether you’re self-employed, own a business, or just need to file your annual tax returns, you may find that documents just keep piling up. Receipts, prior tax returns, bills, and a variety of other financial documents clutter desks and explode out of filing cabinets. But what can you do? Luckily, there are generally agreed upon guidelines regarding how long you should keep most financial documents. In a sense, each item has an expiration date; a time when you can toss it and not look back.
Long Term Commitments
Before you start tossing things, it’s important to know what you should be keeping for the long haul. Nondeductible IRA contributions are at the very top of this list. Because these are attached to a retirement account that you’ll eventually withdraw money from, you’ll need proof that you’ve already paid taxes on these funds. File the IRA records safely away and forget about them for now. Just know they’ll be there when you need them.
While nondeductible IRA contributions are the only category entirely covered by this rule of permanent retention, there are some other select items that should be retained. For example, always keep the bills for major purchases in the event that they are lost or stolen. This category includes bills for cars, antiques, jewelry, and even appliances, rugs, and home improvements. You may also want the bills from home improvements if you sell the home and need to calculate what you’ve invested in the property.
The Seven Year Itch
Seven years is something of a magic number in the finance world. This is in part because the IRS is allotted up to six years to challenge your tax return in cases where it believes you’ve underreported your income by 25% or more. Additionally, note that failure to file a return or filing a fraudulent return is grounds for prosecution and there is no time limit regarding IRS follow-up on these cases.
In typical cases, the IRS only has three years to challenge a return due to good faith errors, but in addition, you also have up to three years to claim an adjusted refund if you discover an error upon review. Keeping your tax returns for seven years, then, insures that you have all the documents you need, even if there has been egregious misreporting.
Seven years is also the upper limit for retaining any documents related to a securities loss or bad debt deduction. You should also keep any credit card receipts or statements related to tax expenses for this seven year period. If you file all of your documents clearly by date and sort based on how long they should be kept, it will be easy to grab any files with a seven year expiration date and destroy them after that date.
For A Limited Time Only
Many major financial documents can be kept for a year or even less, especially if there are duplicate forms of documentation for a single purchase. Credit card bills, for example, can be discarded as soon as they are checked and paid, unless you need one to prove a tax deduction. Similarly, ATM receipts and other bank statements should be checked against each other and filed accordingly – if you even don’t receive these in paper form anymore.
Pay stubs should also be kept for a yearin order to be checked against W-2 forms, but can be discarded thereafter. You may need to track these a bit more carefully if you are self-employed and file quarterly taxes, but otherwise your pay stubs should be fairly easy to keep in order.
Receipts On Receipts
Here’s the good news: For the most part, you have no reason to be keeping receipts. Hold on to them for the period that returns are valid or for as long as a warranty might last, but no longer. Unless they’re part of a tax deduction like a business meal or home office purchase, throw out receipts immediately. They will just turn your financial records into an undecipherable mess and will make even the most seasoned professional flinch at the thought of doing your taxes.
Digital Options
In the 21st century, you have more options for organizing financial records than in the past. After all, even if you can throw out all of your receipts and you carefully sort all of your canceled checks and keep only the important ones, you may still find yourself overwhelmed by little bits of paper, some more decipherable than others.
Luckily, digital filing systems are a great alternative to hard copies of all these documents. In particular, digital filing takes up way less space than a six foot tall filing cabinet in the corner, and you’re far less likely to lose things. You also have a lot more flexibility with how you organize digital copies of important documents than you would have otherwise. If you’re prone to disorganization, this can be an incredible safety net.
The best strategy for filing any paperwork relevant to your taxes is to immediately scan these items upon receiving them. Then, archive them with clear labels and either file the hard copy version or shred and discard them. Scanning documents on the ‘long term commitment’ list will also keep things from falling apart or getting lost as they age. You may not be worried about that jewelry receipt now, but it’s likely to be in sorry shape twenty years from now, if you can even find it.
Personal And Professional Financial Services
Due to the personal, vulnerable nature of financial documents, it’s vital that you have a financial management team you can trust. At Shockley Bookkeeping and Tax Services, we are committed to handling your financial data with the care and respect we would give our own. Contact our team of professionals today to discuss your financial management needs. Shockley Bookkeeping and Tax Services offers everything from standard tax preparation to bookkeeping and payroll for your business. Let us guide you through the complex world of financial management – our experts will lead the way.