Do you know how long to keep your important records? When it comes time to make the decision to save or shred, knowing which financial documents should be held on to will prevent you from unnecessary trouble down the line. We'll tell you which financial forms to keep and how long to keep them so you can file your records with ease.
What financial documents should you keep?
A good rule of thumb when deciding what documents you need to keep, ask yourself "is this a hard to obtain document?", "why do I need to keep this?", and "will this document contribute to my understanding of my finances?".
If the documents are easily duplicated elsewhere, such as online banking or credit-card statements, you probably don't need to stash paper copies in your filing cabinet. It's good to keep only the essentials so that there is less room for losing documents. We'll talk about how to appropriately rid yourself of unnecessary documents later in this blog.
When considering if a document will contribute to yours, or an accountants', understanding of your finances then you can refer to the following list. We've listed different categories you'll want to consider, and what type of documents might fall into each category.
Deeds, closing documents, mortgage documentation, insurance, and receipts for home improvement projects.
Titles, insurance, and leasing information.
Records of stock purchases, stock certificates, and retirement plan information.
Receipts for anything that you would want to itemize on your tax return.
Receipts for charity donations.
Bank statements should be kept for 3 years in order to be available in case of an audit.
If you’re self-employed, monthly bill statements such as your electric, phone, and cable bills are necessary for proving deductions.
Prior tax filings
Copies of your previous tax filings should be made and kept, as the information on them will be needed when completing the next years' taxes.
Paystubs should be kept until you receive your W-2 in order to ensure that the document is filled out correctly.
How long should you keep financial documents?
How long you should keep documents depends on the type of documents, its purpose, and what it is recording. For tax purposes, the IRS details a period of limitations that is helpful in determining how long to hang on to your important records.
|Less than 1 year||ATM receipts, paystubs, bank deposits, and credit card payment receipts|
|1-3 years||loan documents, car titles, stocks, bonds, and mutual funds, receipts for items used as deductions, bank statements|
|7 years||previous tax returns, all tax records|
|Forever||records related to capital assets, IRA contribution statements, wills|
What documentation is needed for tax returns?
When the time comes to prepare your taxes, certain financial documents are necessary to file accurately. Some documents will be those that you already have on hand after careful collecting throughout the year, while others may be mailed to you right before tax time.
1. Income documentation - W2s, 1099s, and paystubs
2. Prior tax payments
3. Supporting documentation - Receipts, bills, and bank statements
Even if a document is not needed for your tax return, that does not mean it should be disposed of without consideration. Nontax documents should still be held on to for an appropriate amount of time in case they are needed for other purposes such as insurance documentation or credit.
Why keep financial documents?
At first, keeping a file of financial documents for such long periods might seem unnecessary. However, holding on to important records can help you in a variety of situations such as dealing with the IRS, preparing financial statements, and negotiating with the bank.
If you get audited by the IRS, it is crucial that you are able to produce your financial documents quickly. In order to build a foundation for yourself in the event of an audit, you'll need as much documentation as possible. This will help prove to the IRS that you either made a simple mistake, or that there were no errors on your taxes. However, if you are lacking crucial financial documentation, then there's no way to prove that you aren't in the wrong.
When applying for a mortgage or other large loan, you may be asked to produce previous tax returns as proof of income. Some of these documents can include: credit report, bank account statements, personal/business tax returns, income statements, balance sheets, cash flow statements, accounts receivable and payable, and debt schedules. Banks like to look over these documents to ensure that you would be responsible enough to pay back a loan.
If you need to amend a tax return, you will need to reproduce the relevant documentation. Again, it's important to keep documentation to fix any mistakes that might have been made on your tax return.
How to dispose of financial documents
Financial documents contain a wealth of sensitive information such as your name, address, and Social Security number. It's important to shred any financial document you need to dispose of in order to not get any personal information stolen by identity thieves. This information can be used by malicious thieves in order to open up lines of credit or even file a fraudulent tax return in an attempt to collect your tax refund.
Investing in a shredder will help you to eliminate any traces of personal information located on your financial documents. Often times, there are also free shredding events available in your community where you can easily shred documents. Of course, going paperless and using e-statements and documents can also help greatly reduce the risk of identity theft.
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