Sunday, May 31, 2015

Keep records for at least 7 years

It is that time of the year when people like to get rid of the excess paper that we tend to let pile up in our office or houses.
The general rule of thumb is to keep all financially related documents (especially if it was used in the preparation of your tax return) for at least seven years (as the audit period for the IRS can be up to six years). Tax returns, W-2s, brokerage statements, real estate purchase or sale documents should be kept permanently.
Why, you ask? Some of the information on these returns and other tax documents can be helpful on future tax returns or calculations. I have also heard of situations where the Social Security Administration did not have a year of wages recorded from more 20 years ago and all of the documentation the government has related to those wages have been destroyed. Your copy of the W-2 may be the only thing that would help you in getting more in additional benefits.
For businesses, the documentation that you need to keep is just about every invoice in which you were paid from a customer as well as every receipt and invoice you paid to a vendor or supplier.
For individuals, you need to keep details of all deposits into your personal bank account(s) (to show whether it was income, a gift, a refund or something else that is not income) as well the expenses that you paid that you claimed on your individual tax return.
Remember that you do not have to keep all of the documentation on paper. So, if you are good with electronic storage and can scan the documents and store them on your computer, you can destroy the paper. But be sure that you are backing up your hard drive to a separate drive or to an online service. I have heard many horror stories of lost data that cannot be recovered and it can cost your dearly later.
Also, note that I said to destroy the documents. This means that it needs to be shredded. Most of us hear the hacking stories of identity theft, but there are many people who still do what is called “Dumpster diving” to get that financial information to take your hard-earned money.
Please note that you should consult your tax professional or attorney to understand the retention policy for employment records, insurance policies, time logs, etc., because they can be different.