Clean Out Your Financial Files

Financial Files

What Should You Do With All Those Financial Files?

Now that tax day is behind us once again.. it is a great time to give your office a spring cleaning by getting rid of financial files that are no longer necessary.

In most circumstances, the IRS has three years from the April 15 deadline to audit your return.  This means that on April 16, most people can begin to purge older financial records.  Use the tips below to help you decide which documents to keep and which ones to shred.

Keep digital or paper copies of your tax returns indefinitely.  You will need these to apply for such things as loans, financial aid, mortgages and disability insurance.

Shred supporting financial files such as documents and tax forms that are three years or more past their filing deadlines.  Some examples of these documents are mortgage interest reports, credit card records, checks, receipts, letters of proof of charitable contributions, records of capital gains and others.

For specific information on these types of tax records, see Recordkeeping for Individuals, Publication 552 from the IRS.

Shred additional financial files that you do not need to support your tax returns. Unnecessary documents include reconciled brokerage statements, receipts not needed for documenting business expenses and pay stubs that have been reconciled with W-2 forms.

If you make charitable contributions via a payroll deduction, however, save your December pay stub for at least three years to document your contributions.

Shred bills unless you need them for a specific reason.  For example, if you are going to claim a home-office deduction, you will need to save your utility bills. You also might want to save your utility bills if you are planning on selling your home since many prospective buyers will want to know the cost of owning the home.

Do check with your utility company, however, since many utility, credit card and loan statements are available online for more than a year.  If this is the case with your statements, you do not need paper copies unless the relevant documents are necessary to support a tax return and will be available for less than three years.

Financial Files You Need to Keep Longer Than Three Years:

Form 8066.  You will need this report of non-deductible IRA contributions until you empty the account.  This is to ensure that you do not pay additional taxes on the funds when you retire.

Records of mutual fund and stock transactions made using taxable accounts.  Do not discard these while you still hold the investments since you will need to report information from these documents when you sell your shares.

Home-improvement and purchase documents.  Keep these for three years after you sell your home.  If you are unmarried and have lived in your home for two years of the past five, you get a $250,000 exclusion of home-sale profits.  For married people, the exclusion amount is $500,000.

If you have not lived in the house for the required time or your profit is greater than the exclusion, however, you can use home-improvement records to document an investment in your home and reduce your tax burden.

Be sure to keep all of your financial files for six years if you are self-employed.  This is especially important if you have several sources of income.  The IRS can audit people six years after the filing deadline if they fail to disclose more than a quarter of their income.

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