With the proliferation of new receipt and expense organizing apps, such as PaperTrail, ShoeBoxed and OneReceipt, tech-savvy types are finding it easier to get organized for tax season.
But if you’re like me and have yet to catch up with all the latest apps, you’re still rummaging through stacks of paper W-2s, 1099s, receipts and other financial records in preparation for filing.
Here’s how to get your paperwork organized (finally!) and tame that ever-growing receipts & records drawer.
Step 1: Take Stock of What You Have
In preparation for de-cluttering, you’ll need to first assess and sort the types of documents and files you’re working with.
Common categories can include previous years’ tax filings or tax forms; pay stubs; bank, loan, retirement account or mortgage statements; assets sales receipts noting gains/losses (such as stocks, vehicles, or residential property); expense or deduction receipts; insurance or annuities; and interest paid/interest deductions, such as student loan interest.
You’ll need this list later to keep track of what you choose to keep in paper or electronic form vs. what you dispose.
Step 2: How Long Do I Need This?
How long you need to keep financial records depends on why you need them. For most of us, that means our annual tax returns, but there are other reasons (such as insurance claims, asset sales, or investments) for why you may wish to keep financial records beyond tax season.
An insurance or financial professional can advise you regarding these records. For tax purposes, however, the most important factor in your record keeping should be the IRS.
Their statute of limitations for audits on filings typically extends three years after your file (or the tax return’s due date), so you’ll probably want to keep your records at least this long. But this doesn’t apply if you don’t file, or if the IRS has any reason to believe fraudulence: There is no statute of limitation in these cases, so keep any relevant tax documents as long as possible if this applies to you.
Note, too, that if the IRS believes you’ve underpaid your taxes significantly (by 25% or more), the statute of limitations can extend for up to six years. If you have any doubt about underpaying, store these documents for this longer period of time. The self-employed are generally subject to more scrutiny, and longer statutes of limitations. They should hold on to filings records for four years.
Step 3: Sort Your Records
The IRS and many experts suggest you sort financial records and receipts based on how soon you’ll need them. Active File documents are exactly that – items you’ll actively need in the coming year, such as W-2s or expense receipts.
It’s suggested you keep paper versions of these if possible; a scanned or electronic back-up is also a good idea. At the end of the tax year (or once you file), you can safely dispose of the following:
Pay stubs: Reconcile these with your W-2 and then pitch them.
Bank statements: Say bye-bye to your monthly statements. Since these are stored for free in your online bank account portal, there’s no reason to keep them longer than this, unless there are unusual or important financial events occurring that particular month. In this case, you’ll want to keep either a paper or scanned electronic version for your records.
Investment Statements: If you’re still receiving paper versions of these, shred them once you receive the year-end statement. Like bank statements, however, you should opt to receive electronic communications, if possible, to minimize your paper file.
Receipts: Once you file your taxes, paper receipts for expenses or deductions should be shredded. Scan or upload electronic versions of these to meet IRS statute of limitation requirements, however.
Loan Interest Statements: Ditto here. Statements for student loan or mortgage interest paid, for example, should only be kept in paper form until the year-end version is available and your taxes are filed. Then, keep an electronic version on hand until the statute of limitations elapses. Fortunately, these are usually available in your loan servicer’s account portal.
Records that you no longer actively need – but may need to access in an audit (remember your statute of limitations) or other financial event – should be kept in what’s known as Dead Storage. These items usually don’t need to take up physical space in your drawer any longer, and can be scanned or uploaded into the cloud or another online storage service.
Examples of this can include electronic versions of any of the items listed above, along with records of property sales, retirement account yearly statements, lawsuit or legal proceeding gains, lottery or gambling gains/losses, and so forth.
Remember that the stature of limitations begins when you claim a gain or loss on the asset on your taxes, so if your return suggests you lost $2,000 in the stock market this year (ouch!), you’ll want to keep the record for the full relevant statute of limitations after such a tax event occurs.
Ditch What’s Left & Document the Rest
Your final “disposal” pile should include anything supplanted by more recent copies or filings, items you’ll no longer need, or files past the statute of limitations. This is the stuff you can pretty definitively get rid of. Make a note of the location and type of storage for each document.
For example, you might note that you’re storing old tax filings, deduction and expense receipts in paper and electronic forms, but that your bank and loan statements are only being kept in your online account. This will make accessing your records easier, and will also facilitate the transition to newer, more efficient forms of storage in the future.
One last thing: Keep note of what you ditch, too. It’ll not only help you keep track of what you’ve disposed, but it can also increase your confidence in your record-keeping abilities.
How to Organize Your Tax Records and Receipts was brought to you by Five Ten Twenty Club.