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Spring Cleaning for Your Finances

Spring Cleaning for Your Finances:  How to Declutter without Losing Important Records

Just like your home or backyard, your financial documents can benefit from a spring cleaning. However, knowing what to keep or shred is not always obvious. Whether you’re wondering about last year’s utility bills or your 10-year-old tax returns, we’ll guide you through the ins and outs of decluttering your documents while staying properly organized.

Tax Records:  Keep for Seven Years

The IRS recommends holding on to tax returns for three years minimum. [i]   That aligns with its general ability to go back three years in any audit. However, we recommend keeping your tax returns and backup documentation for at least seven years.   Here’s why:

  • There are certain situations where you need to keep tax returns longer. For example, if you have a claim for worthless securities or bad debt deductions.  
  • While the IRS states that it normally audits three years at a time, it can go back further if it finds substantial errors (usually, up to six years).  [ii] 
  • Some states, like California, authorize audits that go back more than three years, so your state’s requirements are also critical.

It is always a good idea to keep actual tax returns longer or even indefinitely, especially if you can keep your tax records in digital form.  But we do recommend that you retain both the tax returns and associated documentation for seven years.  That way, you’ll be well prepared in case of an audit. 

Personal Credit Card and Bank Statements:   One Year 

Most paper credit card and bank statements need a shorter retention period since you can usually retrieve them online if needed. For general purposes, one year is usually sufficient. 

One caveat: if any of these contain charges included in tax deductions, these should be kept alongside your tax returns for seven years.

Business Bank Statements: Seven Years Minimum 

If you’re a business owner, you should keep your banking, credit card, and investment statements for a minimum of seven years. These financial documents form a vital part of your business records. They may be needed for tax purposes or for any legal disputes that may arise. 

Real Estate Documents:  Requirements Vary 

All real estate deeds, mortgages, and bills of sale should be kept indefinitely. These documents may be crucial for future transactions or legal matters, so hold onto them.

Your Home. As a homeowner, you should keep receipts for substantial improvements such as remodeling projects and additions. It is also important to keep records of expenses incurred in buying or selling your home, such as legal fees and real estate commissions. These expenses can help you reduce your capital gains tax when you sell.  We recommend keeping these records for six years after you sell the home. 

If you’re currently renting, less recordkeeping is required. Rental agreements are usually safe to shred after you’ve moved out and received your full security deposit back.

Investment Property. Be sure to keep documentation or receipts for property costs and improvements for investment properties. These are necessary for taxes but may also help you when it is time to sell the property. In addition, keeping detailed records may protect you in the case of any legal disputes. 

Records That You Can Destroy After One Year

What about all the day-to-day paperwork that can pile up fast? The good news is that much of this can be shredded at the end of the year.

  • Receipts for small purchases can generally be shredded once you are happy with the purchase. However, in the case of larger purchases or extended warranties, you may want to keep the receipt longer. 
  • Monthly brokerage statements and pay stubs can be shredded once you verify that everything matches your annual W-2 or 1099 tax statement.   
  • Monthly utility bills can usually also be destroyed once you have verified everything is correct.  
  • One caveat: if any of these statements contain items you’re deducting from your taxes, then it’s best to retain those as part of your tax records.

Are Digital Records as Good as Paper? 

The IRS has accepted scanned or digitized receipts since 1997. [iii]  However, they require that all documents be stored in a legible, readable format. Scanning your records is a great space saver, but just be sure that the files are securely backed up to a cloud or alternate file location.

Also, signing up for e-delivery of records allows you to send statements directly to storage, which can be a huge timesaver.   

Key Takeaway

Spring cleaning is a great idea for your financial documents. Just take care to keep what’s essential so you can streamline your financial records while ensuring you’re prepared for whatever the future holds. 

[i] https://www.irs.gov/businesses/small-businesses-self-employed/how-long-should-i-keep-records#:~:text=Keep%20records%20for%203%20years%20from%20the%20date%20you%20filed,securities%20or%20bad%20debt%20deduction.

[ii] https://www.irs.gov/businesses/small-businesses-self-employed/irs-audits#:~:text=Generally%2C%20the%20IRS%20can%20include,possible%20after%20they%20are%20filed.

[iii] https://www.irs.gov/pub/irs-tege/rp-97-22.pdf

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