To Save or Shred. That is the Question. (Part 1)
Almost every year at tax time the question comes up at my house to as what documents should we keep and how long should be keep them? The big issue is how long to keep your tax records. The consensus of various resources is that tax records should be retained for seven years. The reason is that the IRS has 3 years to audit if there is reason to think an error has been made in filing. The agency has 6 years in situations where a person’s gross income has been under reported by 25 percent or more. If you missed a year when filing your tax returns for any year you’ll need store your tax records indefinitely.
As far as other documents here are some other rules of thumb when deciding what to keep and how long:
- Pay stubs until you have reconciled them your W2
- Bank statement for one year with exception of records related to taxes, home improvements, mortgage payments and major purchases. Many Banks offer a paperless option and you can download your records when needed.
- Keep credit card statements for 45 days and retain the statements needed for tax records.
- Medical records including bills, prescription information and insurance information for 5 years in case of a dispute.
- Insurance information:
- The policy for as long a use the service plus 5 years.
- Statements, hospital bills, car repair bills for 5 years after the service was provided.
- Warrantees until they expire.
- Paid utility bills can be discarded unless need for taxes
- IRA contribution records until the money is withdrawn
What about when you buy sell or a home? Keep all the paperwork related to the purchase or sale for six years after you sell the home. All keep the receipts and records for any home improvements. And when you list your home for sale keep a record of any expenses related to the sale, including the commission paid to your real estate agent as you may be able to use it to offset any capital gain tax.
Having an idea of what keep raises the question of how and where to keep it. Most paper work can be stored in a sturdy file cabinet or file box but other more critical items need to keep some where more secure. Some of documents that be kept in a secure location:
- Social security card
- Marriage certificates/divorce decrees
- Birth and death certificates
- Passports
- Wills
- Photo copies of drivers licenses, green cards, and critical pieces of identification, bank account numbers and credit cards.
- House hold inventory
There are two options for storing papers securely: a safety deposit box or a fire resistant box at home. A safety deposit box maybe the most secure but requires a yearly fee. A fire proof box at home has the advantage of being accessible when needed.
Next week: We’ll look at what needs to be shredded and how to best accomplish the task.
Resources: https://www.atg.wa.gov/page.aspx?id=13148#.UvLGMOmPIXc