NEW YORK (MainStreet) -- You don’t have to keep every tax or financial document that crosses your path – the receipt for this morning’s donut and coffee come to mind – but for record keeping purposes, there are tax records that take precedence over others.
It takes some paperwork, but keep things relative. After all, the IRS says that 144 million individual income tax returns were filed in 2011.
Nobody’s asking you to fill a warehouse with tax documents like Uncle Sam, but a little organization now goes a long way later.
Here’s what we mean. If the IRS has a question that pops up down the road, or worse, hauls you in for an audit, not having the right paperwork can pave the way for a logistical and financial nightmare that may take years to recover from.
To avoid that, or at least diminish the chances of that happening, apply these tax record tips so you’re good and ready if Uncle Sam comes calling:
The basics: Make sure you hang onto your own personal financial documents. That means items like paychecks (online bank deposits are fine), W-2 forms, home mortgage and insurance documents, investment statements and all 1099 forms.
You’ll also need to keep Form 1098 (mortgage interest paid); any taxes paid; medical expenses; charitable contributions; business expenses; home repairs or improvements; professional or union dues; car or travel costs (if you deduct these for work); child care and/or education expenses (some of which are deductible). You'll also want to save copies of your old tax returns, which can be extremely useful to refer back to when you're filing each year.
Insurance and medical records: Hold on to papers linked insurance claims and medical expenses. Organize them by date, and keep any receipts.
Keep “loss” records: Identity theft is a huge issue these days. So keep all records if you’ve been victimized. Also, if you’re house is broken into, or you’ve been the victim of a crime where you suffered financially, that theft loss should be documented, including the value of the financial loss, the date of the crime and any law enforcement paperwork linked to the crime.
Charitable records: In general, any charitable contributions valued at $75 or more requires a receipt. In addition, you can only deduct a cash donation of $250 or more if you have written confirmation of the donation. Here’s how the IRS explains it:
To claim a deduction for contributions of cash or property equaling $250 or more you must have a bank record, payroll deduction records or a written acknowledgment from the qualified organization showing the amount of the cash and a description of any property contributed, and whether the organization provided any goods or services in exchange for the gift. One document may satisfy both the written communication requirement for monetary gifts and the written acknowledgement requirement for all contributions of $250 or more. If your total deduction for all non-cash contributions for the year is over $500, you must complete and attach IRS Form 8283. When you organize your charitable giving records, make sure to include mileage, parking fees, and other transportation costs. Also add the name of the charity, the dates of the actual contribution, and any expenses incurred.
Have a time frame: Unless you've got a ton of space, you don't want to hold onto these papers indefinitely. It’s a good rule of thumb to hang onto your paperwork until the chance of a tax audit passes, which is typically three years. But if the IRS thinks you might have underreported your income by 25%, the agency does have a six-year statute of limitations. That's why it's a good rule of thumb to keep all your relevant tax documents for a full six years, after which time they can be shredded and tossed.
Storage tips: Where and how should you store your records? After all, it's no good to have your tax records organized if you can't get at them when you need them. Ideally, you’ll store your financial documents both online and offline. Offline, you’ll want to devote a drawer, safe or filing cabinet specifically for tax records. Make sure you earmark individual folders for previous years' returns, income, deductions, etc. (another tip: keep copies in two places, in the event of a fire or flood). If you store your tax records online, make sure you have reliable backup copies.
The IRS allows online records, so long as they’re legible and readable. Use online storage web sites like DropBox or SugarSync (which allows you to store documents and move them from your computer to your smart phone) to securely store your files.
You don't want to turn into a packrat, but for your own usefulness and peace of mind, it's a good idea to hang on to those tax documents. Keeping them in an orderly, accessible place — whether it's a dedicated desk drawer, file cabinet, secure website or computer hard drive — makes it that much easier to use, and that will help give you some peace of mind should the tax man come calling.