Feeling overwhelmed by stacks of old documents? You're not alone! As you sift through those boxes in your basement, the question inevitably arises: "Can I finally get rid of these?" Let's dive into what the experts say about decluttering your paperwork.
Tax Returns: The Cornerstone of Your Financial Records
Let's start with the most critical document: your tax return. This is the official record you file with the IRS every year.
"The IRS can audit you for any reason for three years from the date you filed your return," explains Paul Mendelsohn, a CPA. But here's where it gets interesting: "The IRS has more time if you pay late, file an amended return, file a fraudulent return, or leave out income that is at least 25% of what you reported."
Mark Gallegos, another CPA, adds that the seven-year rule exists because the IRS typically has up to six years to audit your return if there's a significant issue like unreported income. The seventh year acts as a buffer.
But here's a crucial exception: There's no time limit for the IRS to pursue those who never filed a tax return or filed a fraudulent one. So, the bottom line? Keep your tax returns for at least seven years, and possibly forever.
Supporting Tax Documents: What to Keep and When to Toss
What about the documents that support your tax return, like W-2 forms, 1099s, receipts, and expense records?
According to Gallegos, these can usually be discarded after seven years. Mendelsohn suggests that you likely won't need these documents for more than three years.
So, the general rule is to keep these records "for three years from the date you filed your original return, or two years from the date you paid the tax, whichever is later."
Bank and Credit Card Statements: Navigating the Paper Trail
Next up: bank and credit card statements. These can quickly fill up a box!
Mendelsohn says these can be shredded after a year unless you need them for tax purposes. However, Michelle Crumm, a certified financial planner and tax expert, advises keeping these records for a full seven years.
Consider keeping a digital copy if you're worried about losing access.
Property and Investment Records: The 'Seven Years Plus' Rule
For homeowners and investors, the rules change. These documents need to be kept while you own the property or investment and for at least seven years after you sell it.
The reason? These records are key to calculating your cost basis, which impacts how much tax you owe when you sell.
So, safeguard the deed to your house, title to your car, your mortgage or car loan, for as long as you own the property.
Retirement Account Records: Ensuring Accurate Reporting
The 'seven years plus' rule also applies to retirement accounts. Hold onto records for your IRA or 401(k) as long as the account is active and for seven years after it's closed. These are important for ensuring distributions are reported correctly.
'Forever' Documents: The Essentials to Keep
Some documents are so important that you should never throw them away. Crumm lists adoption papers, birth certificates, death certificates, divorce decrees, lawsuits, marriage certificates, diplomas and school transcripts, health and immunization records, and Social Security cards.
If you have estate or gift tax records, keep them forever.
Documents to Discard When You Receive New Ones
Some records are redundant. When you receive a new property tax assessment, it's safe to toss the old one.
Other documents you can safely shred when you get a new one: credit reports, Social Security statements, and vehicle registrations.
What About Everything Else?
If you have an old document not mentioned above, the seven-year rule is a good guideline.
But here's a thought-provoking question: What if you own a business, failed to file a tax return, or got sued? Would you wish you had held onto every shred of paper?
So, what do you think? Are you a 'keep everything' person or a 'shred it all' minimalist? Share your thoughts and experiences in the comments!
