Part of being a diligent taxpayer includes keeping proper documentation. One rule to good organization is keeping up with your tax related documents as soon as you are done with them. There are some documents that need to be kept for years and other that can be tossed away as soon as you have finished using them. Acting immediately can help cut down on the clutter and disorganization.
By filing away paperwork as you handle it and digitizing documents if necessary, you will be more likely to be able to find exactly what you are looking for at the time that you need it. One in particular time of importance is tax time. Without the proper documentation to back up your figures, you cannot get the maximum deductions and tax credits on your income tax return.
Seven Years Worth of Tax-Related Documentation
Ideally, your tax records should be kept for seven years. The IRS typically does not require tax returns older than 6 years, but they have asked for older. Therefore, it is a good idea to have tax documentation including receipts, statements, 1099s, w2s, and so on that support each tax year. It is best to seal the papers for each corresponding year in one large envelope and label with the tax year for easy reference and retrieval. Tax authorities have six years to collect on taxes after an audit with certain exceptions. They can also pursue legal action within six years. If you are not audited within three years, your chances of not being audited increases dramatically.
Limited Time Records
There are plenty of documents that you will collect over the year that are only good until they have served their purpose. With businesses, the IRS typically does not request actual receipts under $75 dollars, but will require at least a written record with as much detail as possible. Documents relating to investments you’ve purchased should be kept safe until the investment is sold and your tax information is filed for that year. If you have records pertaining to the maintenance and repair of your vehicles, keep collecting them until you sell or trade in your car. You can pass the information along to the next owner, or simply destroy the documents.
Digitizing documents can help you retain and search documents easily. A simple scanner and Google Docs can help you store your document inexpensively in the cloud as well as on your personal computer if you are looking to keep records past seven years.
Understanding the time frame for keeping documents on hand, you can be assured you have the information you need when it comes to tax time. Documenting the expenses and income you have had throughout the year can be a difficult task if you are saving the reminders and the proof of your financial actions. Having an organized method for filing your paperwork will benefit your financial outlook and your stress level when you really need to find important paperwork or take important tax deductions.