For most of us, tax season means taking that annual trip to ‘the abyss’
That place where filing cabinets, storage containers and even shoeboxes overflow with dusty receipts, insurance records and old tax returns.
Considering the sheer volume of record-keeping required by individuals and business owners, here are four tips on which records to keep and for how long:
1. Records to keep for one year
When an insurance policy renews, the previous receipt is worthless. Pay stubs should be kept until your W-2 is received. Also, remember to check that the W-2 information matches your paystubs before shredding the old ones. Likewise, monthly investment statements should be kept until they are reconciled with your annual statement. Bank statements and credit cards bills that renew annually are other examples of important documents with short-lived reference.
2. Records to keep until an asset is sold
Some documents need to be saved for the life of the asset they match up with. For instance, annual investment statements should be kept until the corresponding account is closed. Loan documents, such as a mortgage or auto loan, should be saved until the asset is sold and the loan paid off.
Vehicle records, including receipts, title, and registration should all be stored during the life of the automobile. If you own term life insurance, keep the policy documents until the term expires. After purchasing a large appliance, hold on to service contracts and warranty information until you no longer own the appliance.
3. Seven-year record keeping
The IRS has a look-back review period of three years, but tax returns and supporting documents should be kept for a minimum of seven years. If you are suspected of underestimating your income by 25% or more, the review period extends to six years. Fraudulent returns have no review period limitation. This is also useful if you need to look back at your past income, especially when verifying any income-based Social Security contributions made. Note – scan each tax return to reduce the reliance on fallible paper records.
4. Lifetime records
Birth certificates, marriage licenses, divorce decrees, Social Security cards, passports, and education records should be kept in a safe place for life. Ideally, you should store such documents in fireproof boxes, safety deposit boxes, and as electronic files to be used as a backup in case the physical papers are lost, damaged, or need to be accessed remotely.
Permanent insurance policies such as whole life insurance also need to be saved for life, along with estate planning documents including Wills, Trusts and Power of Attorney records. Also save paperwork that outlines what pension option / retirement plan you selected.
Most importantly, remember that memories can be hazy sometimes and verbal agreements often do not hold up in a court of law. Protect yourself, your family, and your business with accurate record-keeping.