Organizing Your Records for Taxes
During our discussions with our clients it has become apparent that many don’t understand what records they need to save to facilitate preparation of their taxes. The easiest thing to do is to create a file for each year beginning January 1. Include in this file all bank statements (with copies of canceled checks if you have them), all credit card statements (with underlying receipts), all invoices received and paid, all documents related to savings and investment activities, and all documents related to business activities as they are received or the transactions occur. Add to this file all year-end documents (e.g. the last payroll check stub of the year or W-2, 1099s, investment account statements, etc) received. These records can be hard copy or electronic, as long as they are accessible by both you and your tax preparer.
Bring these records with you or send them to your tax preparer well in advance of April 15 to allow your preparer plenty of time to review the records, determine if anything is missing, and perform necessary calculations and research to ensure that your tax liability is minimized.
After completion of your return, your tax preparer can tell you which records you should retain in case of an audit, the length of time you should retain the records (usually 3 – 7 years) and which records you can discard.
Some of the records you’ve collected may impact future years (e.g. records related to the purchase of stocks or bonds, a home or rental property). Your tax preparer should have you place a copy of these records in a “permanent file” that you will bring with you every year. Documents should remain in this file until the underlying transactions could no longer impact your future income taxes (e.g. because you sold a stock or bond in the current year). At this point they would be moved to the current year’s file and be retained with your income tax return for that year.
Contact your tax preparer for more information on your specific tax situation.