Smart Record Keeping

There are people that insist on keeping every receipt for their records.  On the other hand, there are other people that are completely oblivious when it comes to saving anything for their records.  The middle ground between the two extremes is the best course of action for record keeping, minimizing the amount of time taken to prepare your taxes.  It also saves you if you ever experience an audit.   

What Records To Keep

If you know what documents and receipts you need to keep, preparing your taxes will become a much easier task.  You should always retain any document that provides proof of income.  Also retain any documentation that proves your deductible expenses.  All homeowners should also have documents filed away that state a value assessment of their property. 

You should always retain copies of any 1040 forms that you used to prepare your taxes as well as all related tax schedules.  All documents that support your tax return should be filed away with it.  These documents may include but are not limited to: W-2s from your employer, 1099 forms, and any receipt that may be used as verification of a deductible expense. 

Any document or receipt that is not used for the purpose of proving a deduction may be thrown out.  It is not necessary to keep any record that is not used in any way for preparing your taxes. 

Length Of Time to Keep Records

Usually, you should retain any tax-related forms and documents until the possibility of an audit passes, which is to say three years past the filed return date.  However, it is possible that you may need up to six years of documents in the event that the IRS has reason to suspect that you have underreported your income by more than 25%.  A tax professional would advise anyone to retain all tax-related documents for at least 6 years and up to a maximum of 10 years.  

There are some documents which should be stored for an even longer time.  For example, any documents related to stock investments, pension plans, or residences should be kept while you still have ownership of the asset.  Once ownership has been transferred or liquated, you should still retain the records for at least three additional years.  

Where To Keep Records

You have to figure out where to store your records once you have determined what you will need to retain.  How you organize your records and where you actually keep them is completely your decision.  The key point is to always be consistent in your method of organizing so you may always locate any document at any time.     

Do not procrastinate until the time comes to actually prepare your tax return to organize your records.  Rather, start early and build a consistent system for your record-keeping.