The importance of keeping tax documents is not usually emphasized by your CPA. Your CPA might not also tell you things you don’t need, either because he probably assumes that you already know. So here we are to tell you what to keep and what to shred. Why so? We know some of you are guilty of having drawers full of envelopes stuffed with bills and other documents. Some people even have a huge storage box for them. But do you really need to store all of them? What can you throw away?
Tax and financial authorities will agree that keeping tax documents is important. Saving these documents will make it easier preparing for your next income tax return. Truly, settling your account with the IRS does not need to involve turning your place upside down. Knowing what documents to save can also help reducing filing difficulties too.
In addition to the preparations of income tax return, saving documents have other benefits. Keeping tax documents may also come in handy for non tax-related concerns. Insurance companies, lenders, and creditors, for example, often use tax information to verify income and asset value.
What to Keep?
The most important documents to keep are your annual tax returns and you should do so as long as you can. You can get rid of the supporting documents after three years though. Once the time elapses, shred anything that reveal your Social Security number or other personal information to avoid identity theft. Keep any 8606 forms on which you reported nondeductible contributions to traditional IRAs too.
So, as a summary, save any documents that are related to:
Income from wages, dividends, interest or business
Deductions and credits
Home and property
What to Throw Away?
There is really no need to keep everything. Some documents that you can run through the shredder include ATM receipts, bank withdrawal slips, deposit slips, and credit-card receipts. You can also get rid of paper copies of most monthly bills, such as those for credit cards and cable TV.
Do I Really Need a Shredder?
A lot of people debate the need for a shredder. The main issue here is identity theft. Some people may use your information, retrieved from intact documents, to make transactions. If you can do what a paper shredder does, then there is no need to buy one. For those who want to save time however, invest in a shredder to guard yourself against identity theft. Do consider getting a cross-cut or confetti model though. This will ensure unwanted documents become small pieces of paper that are impossible to put back together, hence, protecting personal information.
If you want to know more, refer to the IRS Publication 552 for more information about tax record keeping.