On the list of things most of us hate to do, taxes are followed closely by spring cleaning.
And that’s exactly how those two chores should be handled–in close proximity, with the annual preparation of your taxes nearly coinciding with the rite of purging financial records.
If you are like most people, you are drowning in financial paperwork, from your check stubs to canceled checks to credit card statements, bills, investment paperwork, retirement plan updates, ordinary receipts and tax documentation.
Most of this stuff winds up insulating the attic.
Experts say that financial clutter is best eliminated either before or after the preparation of your taxes, when record-keeping is on your mind and the files for the current year are either empty or slim. Eliminating aged or worthless financial documents, therefore, makes it easier to sort out your finances, both for you and for the loved ones who will inherit your paperwork mess along with your assets.
There are basic rules for destroying old financial documents.
If the account is active, rip up paperwork so that the account numbers are unrecognizeable. Before tossing every scrap of unnecessary paper, make a record of current and past bank and credit accounts, including account numbers and the dates the accounts were closed. Most credit checks cover seven years, but older information sometimes pops up or resurfaces unexpectedly; you will want a record of whom you did business with and when.
With those warnings out of the way, here is what to think about as you attack the papers in your files and on your desk:
– Tax returns. Taxes set the tone for what you should keep in your financial files. Says Lisa Kanarek, who runs the Dallas-based firm Everything’s Organized: “Make sure you have everything you need in case of an audit. Almost everything else can be thrown out; there’s not much point to keeping it.”
If your tax return is simple and straightforward, you can dump almost everything but the tax paperwork itself. If, by comparison, you intend to take an office-at-home deduction, you will need to keep copies of things such as utility and phone bills.
As for the return itself, that gets a bit tricky. The Internal Revenue Service can audit you for three years from the date a return is filed, can pursue underreported income for six years and can chase false or fraudulent returns forever.
You can dump the underlying paperwork (the receipts that justified your expenses, checks proving charitable contributions, etc.) after three years, but you probably should hold them for six. It is hard to prove you reported everything properly if you destroyed the data.
As for the actual tax returns, most advisers suggest letting that be the one thing that clogs your files. Old tax returns–especially those covering the sale of properties–can be important for compiling future returns.
– Check stubs. Assuming you receive everything you are entitled to and have no dispute with your employer, dump the paycheck stubs. Use the last stub of the year to crosscheck your employer’s tax reporting; after that, it, too, can get tossed.
– Consumer bills. Keep credit card statements, utility bills, department store and service-station charges and the like long enough to verify the information and make sure your payments have been properly credited. After that–and unless you have expenses that could qualify for tax deductions–there is no real reason to hang onto this paperwork.
Many organizational experts suggest hanging on to card statements for a year, discarding the oldest statement on file when the newest one comes in. (Keep a statement showing terms of the credit card for as long as you maintain the card.)
There are two exceptions: In case of divorce, expense records may be important in determining who pays children’s expenses and can claim a child as a dependent on a tax return.
You also should retain any bill on which there was a problem involving late fees, disputed charges, fraudulent card use and such. In the event the negative information shows up on your credit report, your ammunition for saving your good name could be a bill showing that a fee was waived, including your notes or correspondence on how the problem was resolved.
– Bank statements/canceled checks/ATM slips. There is absolutely no reason to hold a canceled check from, say, a Chinese dinner or a trip to the grocery store. Once that item has hit your account, it ceases to be useful.
Sort the checks with tax ramifications, such as charitable contributions, mortgage or tax payments, home improvements, etc. Once you balance your checkbook, toss the statements, the remaining checks and any slips from automated teller machines.
– Investment records. Most people keep everything pertaining to their investments, which is overkill. Keep any document that pertains to the purchase or the sale of a security; it will become tax paperwork in time. Monthly brokerage or mutual fund statements and quarterly retirement plan statements, however, probably aren’t worth holding long-term.
– Insurance papers. Old policies suck up file space; typically, they are thick documents that became invalid when the new policy or statement arrived. Keep current copies, ditch the rest.
– Home records. If you make improvements to your home, plan to keep the paperwork until you sell it, when it will come in handy for tax reasons. If you have already sold an old house–or if you have old apartment leases and the like in your files–chances are you have a file filled with meaningless paperwork.
– Warranties. Keep warranty information for as long as it is in effect; after that–or once the product is broken or gone and is no longer under warranty–this stuff is useless.
– Store receipts. Beyond keeping receipts for tax-deductible items, you may want to hang on to sales slips from goods that can be returned, that come with lifetime warranties and more.
Organizational experts suggest clipping those receipts to warranty paperwork, and then periodically emptying your warranty file for those goods you no longer own.
If you aren’t concerned about returning the item or getting a tax deduction from it, toss the receipt.
– Correspondence. If it pertains to your taxes, your credit history–letters closing accounts, for example–or some form of ongoing dispute, keep it on file. Otherwise, most business correspondence is ready for the recycling bin within a year of when it was written.
