Organizing Your Records for Tax Season and Beyond

As we approach the end of another tax season, the topic of organizing your personal and financial records is a timely one. Here is a look at records that need to be kept for future tax returns as well as for other purposes.

IRS requirements

The IRS doesn’t specify any set period of time for specific types of records that must be retained, but they do have time limits as to how long records pertaining to returns should be kept.

  • For the assessment of taxes owed, three years.
  • There is a six year time limit for any underreported taxes that are in excess of 25% of the gross income shown on your return.
  • There is no statute of limitations for fraudulent reporting of your tax liability.
  • Records relating to property must be kept until the period of limitation for any property disposed of and for which a gain or loss was claimed on a return.
  • For businesses with employees, you must keep employment tax records for at least four years after the later of when the tax was due or paid.

It is generally a good idea to keep tax records, including all supporting documents used to prepare your return for anywhere from 3-7 years. Beyond these broad guidelines we suggest that you consult with your tax professional as to which tax-related records you should keep and for how long.

Organizing Your Financial Records

There are various financial records we may accumulate during the year and over time. Regardless of the duration of time we are required to retain these records, there are some general tips for storing documents and records to keep in mind.

  • Safeguard your information. If you are storing paper documents, find a safe place in your home that will keep these records safe from damage or theft. This might entail a safe or another type of secure storage. For digital storage, be sure to use a secure password and to properly back up these records on a separate hard drive or in the cloud. Many experts suggest that these records be separately password protected.
  • When storing records online be sure to use complex passwords to make it more difficult for hackers and data thieves. Be sure to use a different password than you do for personal accounts like email and online shopping. Protecting your computer with antivirus software is also suggested.
  • In the case of paper documents, be sure to properly dispose of them when they are no longer needed. This means a cross-cutting shredder, either at home or at a shredding service. Consider moving to paperless and digital statements to avoid the risk of mail theft in the future.

As far as how long to keep various records, a rule-of-thumb is three years, seven years or forever.

Examples of records to be retained for at least three years include:

  • Household bills
  • Credit card statements
  • Receipts from minor purchases

Examples of records to be kept for at least seven years include:

  • Canceled checks
  • Check registers
  • Bank statements
  • Pay stubs, if you worked for the same employer for the entire year then the year-end pay stub might suffice.
  • Income tax returns including all documentation

Examples of record to keep forever include:

  • Receipts for home improvements
  • Receipts for major purchases
  • Annual investment account statements
  • Gift tax returns
  • Inheritance documents
  • Insurance policies
  • IRA statements
  • Mutual fund statements
  • A copy of your will
  • Health care proxy forms

It is suggested that you keep your filing system simple and easy to navigate. It is also recommended that you go through your records at least annually. Purge any records that are no longer needed and be sure that you have everything you need. Also try to stay up to date on new developments in online storage and security for your personal computer.

Financial institutions are generally required to maintain your records for a period of time. In general, the Bank Security Act (BSA) requires banks to maintain customer account records for at least five years. Other types of financial institutions and custodians may have different requirements, it’s best to check with each institution to be sure.

Keeping good records is important for taxes and other issues. For taxable investment accounts, it is important to have solid records of your cost basis not only for tax reasons, but also to help determine your investment returns.

To learn more about the types of records investors should maintain consult your Wedbush advisor and your tax professional.

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These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable — we cannot assure the accuracy or completeness of these materials. The information presented is not intended to constitute an investment recommendation for, or advice to, any specific person. The information presented here is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances. The information in these materials may change at any time and without notice.