Financial Files You Can Toss
I’m finishing up my taxes and would love to be able to get rid of some of my paper files. What can I safely toss, and what do I need to keep?
SEE ALSO: Declutter Your Life
This is the perfect time of year to go through your old files and shred financial records you no longer need. The IRS generally has up to three years after the tax-filing deadline to audit your return, so you can get rid of a lot of paperwork after April 15.
Don’t toss your tax returns (including your 1040 and supporting tax forms); you should keep them forever. They can provide important information in the future -- if, for example, you need to provide tax information when applying for a mortgage or getting disability insurance. You can keep the paper forms or digital copies (see 7 Steps to Convert Paper Files to Digital for more information about digitizing your records).
But go ahead and ditch supporting documents three years after the tax-filing deadline. That includes credit-card statements, canceled checks or receipts to show deductions, letters from charities reporting gifts, and paperwork reporting mortgage interest or capital gains distributions. See IRS Publication 552 Recordkeeping for Individuals for more information about tax records.
And there are a lot of other financial documents you can toss (or, even better, shred) even sooner, if you don’t need them for taxes. You can get rid of monthly brokerage statements as soon as you check the numbers against your year-end statement, credit-card receipts as soon as everything matches up with your monthly statement (unless you need to keep them for tax purposes, such as documenting a business expense) and pay stubs after they match up with your annual pay reported on your W-2 (but save your December pay stub if it shows charitable contributions made by payroll deduction) .
You can also dispose of copies of your utility, phone and cable bills as soon as the next month’s bill arrives reporting that your payment has been received (but keep utility bills with your tax records if you’re taking a home-office deduction or with your house records if you’d like to show prospective home buyers the cost of maintaining your house). You may not need to keep some files at all if they are easily accessible online -- utility, credit card and loan statements are generally available online for a year or more.
Hang on to a few tax-related documents more than three years:
-- Keep records of stock and mutual fund purchases made in taxable accounts for as long as you hold those investments. When you sell the stocks or funds, you’ll need to report the purchase price, date of purchase, and number of shares. (For more information about new cost-basis reporting rules, see Don’t Miss This Tax Form.)
-- Keep Form 8606 reporting any nondeductible IRA contributions until you withdraw all the money from your IRA, so you won’t be taxed again on those contributions when you take out the money in retirement. See Deductible Versus Nondeductible IRA Contributions for more information.
-- Keep home-purchase and home-improvement documents until three years after you sell the home. Most people no longer need to pay taxes on their home-sale profits – single filers can exclude $250,000 in profits, and married couples filing jointly can exclude $500,000, as long as they’ve lived in the home for at least two of the past five years. But if you haven’t lived in your house for that long -- or if your profits are larger than the exclusion -- then the home-improvement records can substantiate a boost in your tax basis (your investment in the house) and reduce any taxable gain. See IRS Publication 523 Selling Your Home for details.
Some people keep all of their tax records for up to six years if they’re self-employed, especially if they have income from a variety of sources. The IRS has up to six years to audit people who neglect to report more than 25% of their income. See Tax Tips for Freelancers and the Self-Employed for more information about self-employed deductions, forms and reporting rules.
For more about what to toss, plus strategies for selling or donating your stuff, see Declutter Your Life.
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