With tax season ending, do you ever wonder what to do with your personal and financial records? Which ones do you need to save for tax or other purposes? While some people like to save things forever, others want to immediately toss out unnecessary clutter.
So what's the best way to decide whether to save or discard your records? Here are a few tips and information sources to help you decide which records you need to save, and how long you need to keep them.
How long should you keep your tax records? The IRS has 3 years in which to audit your income tax return. However, this limit does not apply if you failed to report more than 25 percent of your gross income (the limit then becomes 6 years). There are no time limitations at all if you filed a fraudulent return or if you failed to file a return.
If your state has an income tax, you should also check with your state’s taxing authority to see if they require you to hold your records for a longer period of time. For example, in California, the Franchise Tax Board can issue a tax assessment for up to 4 years after the tax return’s filing date or due date. As a practical matter, this means that California residents would need to hold onto their records for an additional year beyond the federal requirements.
What records do you need to keep for tax purposes? You don't have to keep everything for tax purposes. For example, you can throw away pay stubs after you check them against your W-2 Form. However, you should save any cancelled checks or receipts that relate to an entry on your tax return or a potential future tax return (such as when you sell property at a capital gain or loss). For example, keep receipts for home improvements until you sell your home, since certain expenses can lower the capital gains tax that you might have on your profits.
There’s a short, but handy guide describing how long to keep your financial records a Bankrate's How Long to Keep Financial Records. For a complete guide to tax recordkeeping, see IRS Publication 552, Recordkeeping for Individuals or call 1-800-TAX-FORM (800-829-3676) to obtain a free paper copy.
Before you discard anything that you are not sure about, you should double check with your accountant, attorney, or tax preparer. You can also call the IRS for free taxpayer assistance at 1-800-829-1040.
What about your personal records? Every household also has important records that are not related to tax filing. Many of these records should be kept indefinitely. Some of these records should be kept in a safe deposit box. Examples include birth certificates, marriage certificates, divorce and adoption papers, citizenship records, passports, and military service papers. In addition, any papers that serve as proof of ownership should be saved until the asset is sold. This would include such papers as deeds for real estate, other mortgage papers, automobile titles, bonds, and stock certificates. If you have lost any birth certificates, consider applying for replacements before there is a pressing need. You can find out where to obtain replacements at CDC's Where to Write For VItal Records.
For a comprehensive guide to keeping family and household records, including what to discard, what to put in a safe deposit box, household inventory records, and home files, seethe Federal Citizen Information Center's Keeping Family/Household Records.
How should you discard your unnecessary personal and financial records? After you determine which personal and financial papers you wish to discard, be sure to shred any that contain personal information. Shredding is the best way to dispose of documents that contain your personal information. Therefore, any document containing information that you don't want others to see should be shredded.
Always use a cross-cut, diamond-cut, or confetti-cut shredder. Unlike strip-cut models in which the pieces can potentially be put back together, these shredders will produce much smaller pieces. Crooks will dumpster dive for this type of information, and it could be used to commit identity theft or otherwise invade your privacy.
If you have a very large amount of records to discard, you might consider a commercial shredding service. Some shredding companies can provide a mobile service, enabling you to verify the actual destruction. Others will cart your papers to their facility. Be aware that once your documents leave your home, you can never be completely sure what actually happens to them. Consider using a member of the National Association for Information Destruction (NAID). NAID is a non-profit organization that works to promote responsible document destruction.
Some communities and credit unions offer free annual shredding events which enable you to bring your papers directly to a parked mobile shredding facility. In some localities, Goodwill Industries provides shredding for a nominal fee.