It’s time for some housekeeping for your tax records. A big myth is to keep every single piece of paper that comes your way just in case. Tax and organizational experts say that’s not necessarily correct.
What do you need to hang onto?
Keep records that will help identify income sources, track expenses, determine the value of property, prepared tax returns and their supporting documents.
A good rule of thumb is to hold onto records for 3 years after filing your return. That is typically when a chance of an audit from the IRS will pass; however, if the IRS suspects you underreported income by 25% or more then they can go back 6 years.
Most recommendations are for taxpayers to hold onto their tax documents for about 6-10 years.
If you use something to claim a deduction then hold onto it; however, if you don’t use it then shred it. For example, some taxpayers are unable to deduct their medical expenses.
Some items will eventually sell, such as specific assets. Pension plans, homeownership, stocks and more are such assets. Tax professional recommend hold onto those records for 3 years after you dispose of the asset.
Once you know which records to keep, and which not to keep then it’s time to pick a system. Any system will work, just find one that you like best. It doesn’t matter if it’s a filing cabinet, cardboard box, or computer program. Find a record-keeping system you’re comfortable with it and use it.