Spring Cleaning Your Financial Files
We often receive questions about how long certain financial records should be retained. As the days get warmer, many people are spring cleaning their homes, including all their old filing cabinets. So do you really need to hold on to all those old papers? The IRS offers some guidance with regard to record keeping for individuals. Their recommendations are based on the following deadlines:
The IRS has 3 years from your filing date to audit your return if it suspects good faith errors. This deadline also applies if you discover a mistake with your return and decide to file an amended return.
The IRS has 6 years to challenge your return if it suspects that you under-reported your gross income by 25% or more. They also have 6 years to assess tax on foreign financial assets.
There is no time limit if you failed to file your return or filed a fraudulent return.
With the IRS limitations in mind, here are some general guidelines that can help you confidently shred those useless financial records.
Tax Records
Permanently retain your actual tax return, but you can shred many of your supporting documents after 7 years.
401(k) Statements
Confirm the annual statement matches the deferrals listed on your W-2 form. Retain the annual summary until the account is depleted or transferred. Permanently retain the final statement to provide a paper trail that the account was depleted.
Bank Records
Upon reconciling your bank statement you can immediately shred the returned checks that are of no importance. Retain the checks (or the statement) that will be used as support in completing your tax return. There is rarely a need to ever retain bank statements, returned checks, carbon copies or your check register for longer than 7 years.
Brokerage Statements and Trade Confirmations
Brokerage statements and trade confirmations are used to determine your investment gain or loss on a particular stock or mutual fund. These records should be retained for seven years after the sell of the investment.
Household Bills
In most cases, household bills can be shredded when proof of payment is received. You may choose to retain old bills for one year to help with household budgeting.
Credit Card Bills and Receipts
On a monthly basis, you should reconcile your credit card receipts with your monthly statement. When the two match up, you can shred most receipts. File your receipts for deductible expenses in your current year tax file.
Paycheck Stubs
Retain your paycheck stubs until you reconcile them with your current year W-2 statement. If everything reconciles, your pay stubs can be shredded.
House Records
Permanently retain all closing and settlement statements to your home. Once you dispose of the property, you can shred the closing documents 7 years after the sale.
Healthcare Insurance
You need to keep records of your family’s health insurance coverage. Store the information on the premium tax credit with your tax documents and shred them after 7 years.
Business Income and Expenses
You need to keep receipts and documentation for business expenses for 7 years. If you have employees, you must keep all employment records for at least 4 years.
As a note, nowadays most all documents can be received and stored electronically. Doing so, can reduce clutter in your home and save a few trees! If you find that you have a lot of old documents that need to be shredded, feel free to bring them to our office. We regularly call a company to come over and shred them. Happy spring cleaning!