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Their exist two extremes of people in record keeping.

On one extreme, the side which I used to fight for, we keep documents forever… just in case! You will open our filing cabinets and find a Wendy’s receipt from 1996. (That’s before they had all these crazy Frosty re-inventions)

On the other extreme, you have people who immediately shred every piece of private documentation after they are done with it. Identity theft is a real concern, so that is understandable!

However, I recently had a conversation with a PricewaterhouseCoopers representative about my taxes and proper record-keeping. The person is a personal contact, so it wasn’t any form of paid or professional advice, but it was valuable nonetheless. (Yes, I realize I am incriminating myself. I was talking to a friend about record-keeping by my own free will. Go ahead, make fun!)

So, Start Filing or Get Shredding?

The PWC rep told me that both extremes are correct. Darn you world who often times only sees in black and white! He gave me a quick guideline of what to file and what to shred:

File:

A copy of your tax return (either the printed one from Turbo Tax or a photocopy of the return you mailed in) and original back-up documentation for 7 years. I use a separator in a filing cabinet to distinguish between years. He suggested boxes so you can just throw the box in your garage or closet and get it out of the way. I prefer filing cabinet because you can do “1 year in, 1 year out.” Won’t wind up with 15 years of records by accident that way!

Shred:

You should shred any documents that are past the 7 year limit. If you have an advisor, it never hurts to double check on important documents. Make sure you shred everything with personal information, don’t just toss it.

7 Year Limit?

I figured out why he used the advice of 7 years for holding onto supporting documents by going to the IRS.gov website. The longest amount of time they state you will need to keep your records is 7 years. If you didn’t file a return or filed a fraudulent return, you should obviously hold onto your records indefinitely. In some instances you only need to keep the documentation for 2, 3, 4, or 6 years. But if you don’t feel like figuring it all out… just keep them all for 7 years. Note: Just because the IRS says you can shred your documents doesn’t mean you should. For example, your insurance company may want you to keep documents for longer.

Supporting Documentation

The guy is a tax advisor for PWC, of course the conversation went on. He went on to list a bunch of the records that you generally want to keep as “supporting documentation.” Here are a few of the major ones. As always, you should talk to a professional to get a full list of applicable documents for your situation!

Income & Investment

• Pay checks. Create a “tab” in your filing system for your paychecks. Put each paycheck stub into the file. At the end of the year, make sure all of the stubs equal your year-end statement. If everything balances, you can shred your stubs and just keep the year-end. I haven’t had an issue with this, but I would rather be safe than sorry.
• Investments. The documentation you file for you investments should either state or allow you to figure out your cost basis. The original purchase price, sales price, commissions, dividends, stock splits, load charges, etc should be marked. If you have sold investments, any gains and/or losses should be clearly marked. Stocks, bonds, and mutual funds are all considered investments.

Expenses & Write-offs

• Credit card statements. Just as with your paychecks, file a monthly credit card statement. At the end of the year get a yearly report and make sure everything matches. If so, shred the monthly reports.
• Medical bills. If you have to pay out-of-pocket for any medical expenses, keep the receipts. Not all medical bills are deductible, but your tax preparer can look through your receipts and see what is at the end of the year.
• Child stuff. Whether you receive or pay alimony, these are important documents to keep as they can have a significant impact on your tax status. Also, any documents regarding child care should be kept as they can offer a deductible.
• Mortgage interest. Homeowners should keep documentation on how much mortgage interest they pay. Any amount that goes over $600 will be eligible as a deduction. You will have to fill out a form 1098, so these documents are important. You should keep these documents with your original loan document.
• Home repairs and improvements. The government likes to reward behavior they agree with, and home repair is one of them. They have classified some repairs as being tax deductible, so save all your receipts and figure out if the job you just completed can be deducted!
• Charitable contributions. Obviously, I talk about charity a decent bit. HLR has had a post on savings and charity and I am giving away a gift card to global giving. Contribution rules are tricky and deserve a whole other post. Generally speaking, larger donations should be verified with a document from the charity.
• Taxes. When you go to file taxes, you will undoubtedly use a Form W-2. This form will show your federal tax paid along with your state income tax paid. You need to keep your W-2’s and state income tax returns on file if you made estimated state income tax payments.
• Gambling. This may be hard to enforce, but you are supposed to keep a log of all of your gambling losses and gains. You should have the information classified by date, establishment, people present, and amount won or lost.

Am I Missing Anything?

If I am missing any major documents, give a shout in the comments and let me and the other readers know!

I tried to cover the basics, so any input based off of experience is valued!