Laura reviews tips to manage essential records so you pare down, follow IRS rules, and have what you need for future transactions.
Laura reviews tips to manage essential records so you pare down, follow IRS rules, and have what you need for future transactions.
Money Girl is hosted by Laura Adams. A transcript is available at Simplecast.
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If you're like me and want to store as little paper as possible, tax season is an excellent time to pare down your files to the bare essentials. Whether your system is entirely paperless or you have boxes and cabinets stuffed with mystery documents, it's essential to know what to toss, what to save, and for how long.
This post will review how to manage your tax returns, financial documents, and other critical paperwork so you follow IRS rules, avoid headaches, and have what you need for future transactions.
Welcome back! I appreciate you joining me for Money Girl episode 898! I'm Laura Adams, an award-winning author, on-camera spokesperson, female money speaker, founder of The Money Stack, a Substack newsletter, and host of Money Girl with over 43 million downloads.
If you enjoy the free content we love creating for you, please take a moment to rate and review the show in your podcast app! If you have a question about money, leave it on our voicemail at 302-364-0308. You can also visit LauraDAdams.com to email me and learn more about my books, courses, and the free Money Stack newsletter.
5 Tips for Managing Tax and Financial Records
Use these five tips to know which documents you actually need to keep, for how long, and whether you need physical copies, digital copies, or both.
1. Digitize your filed tax returns.
The IRS allows you to keep digital copies of your filed tax returns and supporting documents, such as for income, tax deductions, and tax credits. In general, individuals must keep tax returns and the backup for a minimum of three years, and you have up to three years to file an amended return or get chosen for a tax audit.
However, you can claim a loss for certain investments for up to seven years. So, if you have complicated transactions, such as the purchase or sale of investments or real estate, keeping that year's tax records for seven years is wise.
While keeping seven years of taxes might sound like a lot, the good news is that digital files are easy to maintain. So, scan your tax returns or ask your accountant for a digital copy instead of adding more paper to your filing cabinet.
If you have a business, the IRS says you must keep business tax records for at least seven years. But they can be digitized, too. You might use a free scanning app, such as Genius Scan, on your mobile device. It has image enhancement features and allows you to export documents as JPEG or multi-page PDF files to email, text, or cloud services such as Google Drive and Dropbox.
If you have stacks of paper to scan, a traditional flatbed scanner with a document feeder can be a time-saver. Many inexpensive printers have built-in scanners that send files to your email.
2. Maximize and document tax-friendly expenses.
I mentioned that you need to keep digital copies of receipts for expenses you claim as tax deductions or credits on your tax return. Getting familiar with tax-friendly costs can pay off because they reduce the tax you pay or increase your tax refund.
A tax deduction is an amount that the IRS allows you to subtract from your taxable income. When you reduce your taxable income, you reduce your tax liability. For example, if your taxable income is $80,000 and you're eligible to claim $30,000 in allowable tax deductions, you only pay tax on $50,000—not $80,000.
Here are a few tax-deductible expenses you may be eligible to claim:
A tax credit is a dollar-for-dollar reduction in the amount of tax you owe, which can be more valuable than a deduction. For example, if you owe $3,000 in taxes, getting a $1,000 tax credit means you save the full amount and only owe $2,000. Allowable credits, such as the earned income tax credit, are often available for low- to moderate-income workers and those with qualifying children.
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3. Keep physical copies of vital documents.
While going paperless has many advantages, you should still store certain vital documents because they're impossible or very difficult to replace. Even if you have a digital copy, keep the following original records.
Also, keep essential documents that you may not be able to get online, such as:
Keep records of large transactions, such as buying real estate, vehicles, and investments, until a couple of years after you sell them. That may include closing paperwork, deeds, titles, and purchase confirmations. You could need them to determine important tax information such as depreciation, capital gains (or losses), and make any amended tax returns.
Consider keeping vital original documents in a secure place, such as a bank safe deposit box or a home safe or filing cabinet that locks and is fire resistant. For added protection, put your essential documents in an airtight plastic bag and keep digital copies if the originals get destroyed.
4. Manage digital files safely.
If you receive documents like credit card statements and insurance policies that you can easily get online, there's no need to keep them as paper or digital files. Going paperless will simplify your life and lighten your filing or archive load.
But for documents you store digitally, it's essential to keep them organized and secure. Consider saving them in multiple places so your information never gets deleted in a computer crash or fire. For instance, you might store digital records on your computer, a password-protected external hard drive, and in the cloud.
You could create a main folder for each year and subfolders for categories like taxes, investment statements, paychecks, emergency documents, or other information you might need. Add a layer of protection by requiring a password to access your main folder. And keep your computer's operating system and security software up-to-date to ward off cybercriminals.
Once you store physical and digital documents, be sure your loved ones know where to find them in an emergency.
5. Get professional advice when needed.
If you're unsure which tax or legal papers to keep or for how long, consult with a professional. In addition to the documents I've mentioned, you may have other records or contracts to keep for business reasons.
To sum up, you should keep tax returns from three to seven years, depending on the types of transactions they record. I recommend keeping returns for at least seven years, especially if you digitize them and they don't take up any space.
You should keep the originals of vital records in a safe place in your home or bank safe deposit box and store their digital copies in multiple safe places.
That's all for now. I'll talk to you soon. Until then, here's to living a richer life!
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