By Bev O’Shea
Tax filing deadlines inspire many of us to vow that we’re finally going to organize our papers.
Start with understanding what should be kept, in what format and for how long. Then, set up a system to organize your records. It doesn’t have to be all-encompassing or perfect — just start where you are.
Organizing will not only make next tax season easier, it will help ensure you or someone you trust can access documents when needed.
Which Documents Should I Save? And for How Long?
Start by gathering documents you should keep forever:
- Birth, adoption and death certificates.
- Marriage certificates and divorce decrees.
- Social Security cards.
- Military service and discharge records.
Next comes documents you may need for many years:
- Property deeds and vehicle titles, until sold.
- Records of home purchase, improvements and expenses, usually until three years after a property exchange transaction.
- Current insurance policies and business licenses.
- Current will and trust documents, and retirement benefit information.
Then, think about tax documents, which you need to save for three years after filing. Certified public accountant John Madison of Ashland, Virginia, says the following documents are a start:
- Investment information, including when you bought and what you paid.
- Medical expense documentation, including health spending accounts.
- Business-related receipts.
- Receipts for charitable contributions.
This tax year has some twists: There’s a charitable giving deduction of $300 per taxpayer in the coronavirus relief package passed in late March, even if you don’t itemize. And if you’re receiving unemployment benefits or working in a different state during the pandemic, save documents related to those situations.
Finally, think about items such as warranties, other receipts and financial statements.
How Should I Organize Records?
First, the bad news: Throwing everything in a shoebox is not an organizational system.
“The shoebox works for no one,” says Lynnette Khalfani-Cox, aka “The Money Coach” author and former journalist who covered financial topics. Khalfani-Cox admits that she has done it, too. She says the shoebox is “a way for people to ‘maintain’ records without putting in an infrastructure and the initial hard work of organizing.”
Setting up a filing system can save time and money in the long run, Khalfani-Cox says. You’ll be able to find supporting information for tax deductions, for example, or receipts to claim warranty or price protection.
Decide whether you’ll organize by topic or year. You may want a physical filing cabinet filled with folders, or a digital version to hold electronic or scanned copies. You can begin to digitize some records by choosing paperless billing and electronic delivery of statements. Then, download those statements as PDFs and drop them into your digital filing system.
No single solution works for everyone; the best system for you is the one you’re comfortable with and will stick with, and one that helps you find documents efficiently.
Khalfani-Cox says temporarily dropping things in a box or file, virtual or physical, is fine so long as you go through it periodically — monthly is ideal.
Francine Lipman, a professor specializing in tax law at the University of Nevada, Las Vegas, recommends reading statements before filing. That can help you discover and plug money leaks like bank fees or forgotten free trial offers that turned into recurring charges.
She also recommends scanning documents that have the potential to fade, such as receipts, then printing them out.
How Do I Keep Documents Safe?
Because these documents contain so much personal data — account numbers, insurance or investment information — they’re a gold mine for identity thieves.
Paper documents should go into a locked location. Crucial items — such as birth and marriage certificates, titles, wills, insurance policies — are candidates for a safe deposit box or fireproof safe. Store the safe “somewhere not obvious in the case of a break-in,” Madison says, and keep digital copies of its contents.
When it’s time to get rid of documents, shred them — it’s a simple way to prevent identity theft.
Once you’ve made digital copies of the papers in your safe, you may feel comfortable enough to switch from paper records to electronic. It saves space and eliminates the need to shred.
Digital files should be locked and/or password-protected or kept on a removable drive. Or, you can store them in the cloud to access them from multiple devices. Madison says documents should also be encrypted, and the software you use for encryption kept current.
Finally, tell someone you trust how to access your files in an emergency.
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Bev O’Shea is a writer at NerdWallet. Email: firstname.lastname@example.org. Twitter: @BeverlyOShea.