How to Make Tax Filing Easier with a Recordkeeping System

Recordkeeping Tips That Could Save You Time and Money on Your Taxes

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Do you dig frantically through piles of papers looking for the documentation you need to prepare your tax return when tax time rolls around? Are you unsure of which records you should keep and which ones you can safely throw away? You can make your life easier and ensure that you don't miss any tax deductions or tax credits if you organize your recordkeeping system early in the year and keep it up-to-date.

Why You Should Keep Records

People are much less likely to keep all their relevant records in one place when much of their financial lives exist online or in electronic form. This isn't to say that the recordkeeping strategy you adopt can't be electronic, but it should be organized so that everything you need is located in one secure place.

Invest in a water- and fire-proof safe if you keep paper records, or consider keeping multiple copies in different locations. Scan in those records you have in hard copy if you decide to go digital. Most importantly, be sure to keep digital records and files secure and make sure you have a backup.

Not only will all this make it easier and less frustrating to file your tax return, but it will also help ensure that you can take advantage of every deduction or tax credit you're eligible for. Keeping records enables you to explain an item on your return that the Internal Revenue Service (IRS) might question in an audit.

The end result could be a higher tax bill if you're audited and the IRS questions a credit or deduction that you can't back up with documentation.

Keeping accurate records can get you all of the tax benefits you're eligible for and prevent you from having to pay additional taxes and penalties for unsubstantiated items.

Records You Should Keep

Your checkbook, personal budget software, or online banking tools can help you remember income and expenses that should be reported on your tax return, but the checkbook or software alone aren't sufficient documentation to prove the deductibility of expenses.

In addition to proof of payment such as canceled checks and credit card receipts, you should also have invoices, receipts, sales slips, or other written documentation that spells out exactly what you paid for. Some itemized deductions that you should document in this way include charitable contributions, mortgage interest, and real estate taxes.

Get a dated and signed receipt showing the total amount and an itemized description of what was purchased if you make payments in cash.

You should be able to determine your basis and whether you have a gain or loss when you sell investments such as stocks, bonds, and mutual funds to prove that you correctly claimed any income you earned. Your records should show the purchase price, sales price, commissions, dividends received in cash or reinvested, stock splits, load charges, and original issue discount (OID).

An Excel spreadsheet is a great way to track investment information, but even a statement from your broker or financial advisor or a handwritten schedule will do.

Be sure to keep your pay stubs as proof of payment if you have deductible expenses withheld from your paycheck, such as union dues, medical insurance premiums, or 401(k) contributions. These can be paper versions or electronic versions if your employer offers those.

The Most Common Records to Keep

These are some of the most common specific records you should keep, and should request if you can't locate them or never received them:

  • W-2 and 1099 forms
  • Bank statements
  • Brokerage and mutual fund statements
  • Form K-1 (for partnerships)
  • Sales slips
  • Invoices
  • Credit card receipts
  • Canceled checks or other proof of payment
  • Home purchase and sales agreements, closing statements, and insurance records

How Long You Should Keep Records?

You're only required to keep tax records for three years from the date you file a related income tax return, but you it doesn't hurt to keep a copy of your actual tax returns, W-2s, and 1099s indefinitely. The IRS destroys original tax returns after three years, and you or your heirs might need information from the returns at some point. You might eventually need to prove your earnings for Social Security purposes.

The IRS can extend the look-back period up to six years in certain situations if you're audited. Having a lengthy and accurate paper trail can prove vital if you're subjected to an in-depth audit of your previous tax filings.