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Integrated Wealth Management

The #1 Thing You’d Never Think to do During Tax Season (But Should)

The last thing on your mind during tax season is getting your financial documentation in order– but maybe it should be. If you’re brave enough to take a crack at it, here are some guidelines to follow.

Why do it now?

Let’s be real.

Organizing tax documentation probably ranks last on everyone’s list of fun things to do. A neatly organized financial house, though, is a great asset to have and can reduce stress overall. Imagine now having to scramble to provide proof of last year’s income. Or, having all your income able to be proven in the blink of an eye. And, heaven’s forbid you get audited; a painful process, but having the required documents can ease at least some of the pain.

Whether for a good reason or a not so good one, you never know when these situations may arise.

Ask yourself this question: as much as you loathe the idea of sifting through the last three years of your financial statements now, would you really be motivated to do it during a bright, sunny weekend in July?

Or, consider this. Isn’t it easier to address things as they come instead of letting them go and having to handle it all at once?

There are benefits to cleaning out your financial closet that go beyond just being neat and clean. How about this? While looking over the paperwork, you may be inspired by deduction ideas that wouldn’t have occurred to you otherwise.  Yes indeed, this exercise could actually save you money!

Time-frames for Cleaning Out Your Financial Closet

Did we manage to convince you to undertake this arduous task? If so, here are some guidelines for how long to keep each type of documentation. These are times from the date of filing, so if you file an extension, the clock starts much later.

  • Tax Returns and Proof of Filing: Keep indefinitely. Period. You just don’t want to be in a situation where you need - but can’t find – them.

  • Supporting Tax Documents: The IRS can contact you for up to three years for errors/questions, but has six years to audit you.  If there is fraud involved, there’s no time limit.

  • Income Related Documents (1099s, W-2s, K-1s): Keep all of these at least three years; if you have income from a K-1, you will most likely want to keep it longer, for about six years.

  • Pay Stubs: Keep about one year, or purge earlier if you confirmed your pay is correctly shown on your W-2.

  • Proof of Expenses/Tax Credits (business receipts, charitable contributions, etc.): Consider keeping all of these for six years.

  • Utility Bills (electricity, internet, and phone): Keep for a year to track usage. If you claimed a home office on your taxes, keep your records for six years.

  • Credit Card Statements: Keep for a year, so you can reconcile your purchases. Keep them for three to six years if needed for tax reasons.  If you can substantiate your tax deductions or business expenses some other way, then you can purge these sooner.

    Investment Transaction Documents:

  • Trade Confirms for Securities (stocks, mutual funds, etc.): About 1 year, or much earlier if you have confirmed the information is correctly recorded with your custodian/broker.  As of 2011, the custodian is responsible for maintaining the cost basis for most of your investments, but you will want to keep records for any transactions made before 2011 or not tracked by your broker.

  • Real Estate Receipts/Confirms: If you made improvements to your financial position, such as a 1031 tax-free exchange or remodel on a personal residence, keep the records indefinitely.

  • Investment Account Statements: Generally keep your monthly or quarterly statements for at least a year so you can verify transactions and cross reference the information on your 1099s.  We recommend you keep your year end statement for each of the last six years.

  • Bank Statements: Keep for a year to confirm the information in your 1099.  For business accounts, we suggest you keep these longer, about three to six years.

Summary on how to organize your tax documentation

What if you want to be lazy?  Okay, okay, sorry we had to make it so complicated. If you just want a couple of basic rules:

  • Keep your records on real estate and your tax return/proof of payment forever

  • If you’re a business owner or have complex investments, keep documents for ten years; if not, keep them six years.

Remember to keep your records in safe place that is water/fire resistant and secure from prying eyes. You can likely purchase a water/fire resistant safe, for example, at your local hardware store for a modest price. Also consider keeping backups electronically, like with Box.com for example. If you’re a client, you have your own Online Vault with unlimited storage.

When it’s time to purge documents, be sure they are properly destroyed by a valid service, or at home with a good quality cross cut shredder.  

Happy cleaning and please reach out and let us know if you have any questions!