Paper Records: What to Keep, What to Toss

Posted on: March 26th, 2010 by

Are you one of those people that keeps every receipt, tax return, and bank statement and then box them all up at the end of the year, only to fill your spare bedroom, attic, or garage with unnecessary clutter?  Well, then this is for you.  As you finish up your tax return this year, take the opportunity to clean house.  You don’t need to keep all of those documents.  I know going paper-free sounds crazy, but if you are willing to start online banking and create a digital archive of important documents, that too, is a possibility in the near future.

CPA Rockville - "Paper Shredder"Before you begin tossing, you should invest in a shredder (or a furry friend) to protect your identity.  The first things that can go are ATM receipts, bank withdrawal and deposit slips, and credit card receipts once they have been checked against statements.  You also only need to keep your pay stubs until you receive your W-2.  The last things that you can get rid of are monthly bills (credit card statements, cable bills, utility bills, etc) that you will not be using to write off business expenses.

You should talk to your local CPA in Rockville for guidance on business deductions.

The most important documents to hang on to are your annual tax returns.  You should keep the actual returns forever, but you can discard the supporting documents after 3 years.  (That’s how long the IRS has to initiate an audit)  Included in these papers are thank-you letters from charities and year-end investment statements.  Also, be sure to keep records that show the initial purchase price for stocks and mutual funds so you can calculate your basis when you sell them.

You also need to save records pertaining to your house as long as you live in it.  Records showing your purchase price and what you spend on improvements may be important when you go to sell your house.  An important tax reason to keep these records: If you sell your house at a hefty profit, certain expenses can be used to lower your tax bill.  Again, the 3 year rule applies, 3 years after the selling of your home, go ahead and shred the documents.

And finally, hold on to all records showing how much money went into and came out of IRAs and 401(k)s, especially if you have made non-deductible contributions.  This is important so you don’t overpay taxes when you withdraw funds.  Also, keep any 8606 forms on which you reported non-deductible contributions to traditional IRAs.  If you have any questions about this paperwork or want to know the best tax strategies for investing in retirement accounts, you should talk to your financial planner/adviser.



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