Keep good tax records all year long
Organizing a system for keeping your tax records doesn’t have to be complicated or expensive. It just has to be…well, organized. But considering that the IRS can audit your tax returns for up to three years (and even further if they find something beyond that time that requires an audit), it’s something that should be done. Even if you’re never audited, without the right documentation, you could miss out on deductions and tax credits that can improve your tax situation.
So, if you spend the days before your yearly tax appointment scrabbling through stacks of unfiled forms and receipts—wishing you’d spent just a little more time on keeping your tax records in order—we’re here to help.
What kinds of records should you keep?
Broadly, you’ll need income and expense records (if you claim expenses). As an individual or joint filer, here are some of the most common items you’ll need at tax time:
Bank/credit union statements
Credit card statements
Brokerage/mutual fund statements
Home purchase/sales agreements and closing statements
Documentation for itemized deductions (e.g., mortgage interest, charitable contributions, real estate taxes)
If you’re self-employed or own a small business, there are other types of records you should keep, and the IRS has a good overview of those items here.
Where should you keep your tax records?
Some people prefer to keep hard copies of everything, organized in folders labeled by category and stored in a file cabinet, a fire- and water-proof safe, or a portable accordion folder. Then, at tax time, they meet with their tax preparer, or they drop off their documents to the firm.
However, a growing number of people prefer to keep and organize their tax records digitally (which now can include scans or photos of hard-copy records). That way, it’s easy to work virtually with their accountant and they don’t have to collate and store paper records. Important: If you use digital files, make sure that a) your system is protected with good cybersecurity practices, and b) you keep an updated backup copy—whether it’s in the cloud or on a removable drive stored in a safe place.
Whichever method you choose, make sure it’s practical and easy for you to use. If it’s too complicated, you’ll get frustrated and end up back in the same disorganized situation that got you looking for an organizational system in the first place.
How long should you keep tax records?
Generally, you should keep tax records for at least three years from the date your original return was filed. However, as we mentioned above, if you were audited, you might want to hang on to your records for a bit longer. Especially if you’re self-employed or a small business owner.
How often should you file items in your tax records?
Ideally, immediately upon receipt. While it can seem like a no-brainer to pop a receipt into a file folder or do a quick scan for upload into your digital files, it’s easy to get distracted. And then you have a pile of paper that needs an hour of work instead of the minute or two it would have taken to do it right away.
At the very least, file tax-related items whenever you sit down to pay your bills each month, so you’re not overwhelmed with things to file and/or scan at the end of the year. (Hint: Get in the habit of jotting down important details right on your receipts[EF1] [LF2] —amounts, dates, type of expense, the reason it's deductible. This will help you remember why you kept it when tax time rolls around.)
Summing it all up
Tax time shouldn’t be a trying time. If you spend a little time now creating a filing system that works for you—or tweaking your current system to make sure it’s effective—your days of scrabbling through piles of paper at the last minute can be a distant memory. Not to mention, you’ll be at the top of your tax preparer’s “Favorite Clients” list!