Organizing Your Personal Financial and Tax Records Pays Off

February 08, 2009  |   Posted by :   |   Personal Tax Advice,Tax Tips   |   Comments Off»

As we are a full month into 2009, I wonder how you are doing with any resolutions you may have made.  It seems every year I have a couple of clients tell me they need to get organized.

With tax season upon us, I thought I would be a good idea to provide advice on how to organize your personal financial records. Of course, businesses will have much stricter recordkeeping and document retention requirements.  Keeping track of your financial records will pay off in the long run and accomplish the following:

  • You’ll simplify the tax preparation process and remind yourself of deductions you might have otherwise overlooked. By keeping the back-up documentation you may save taxes and interest charges. Plus, if the IRS ever questions your return, you’ll have the proper paperwork conveniently in hand.
  • You’ll have a better picture of your complete financial position.
  • Your CPA (Certified Public Accountant) will have an easier time identifying financial and tax-planning opportunities.
  • Your family members will have an outline on how to handle your financial affairs should something happen to you.

With the benefits of keeping your financial records organized in mind, here are some recommended tips to make sure you have everything in order before visiting your CPA this tax season.

Hot to create a Filing System for Tax Records

If you want to keep your financial records in order, it is imperative that you start a filing system. Find a designated spot for all of your current files.  The spot should be in an accessible area in which you can easily get to because you will be regularly filing files here.  Ideally you will want to use a small filing cabinet, but a small accordion file or plastic box will make do for most small families.

You will also need to find a second area in which you will keep your “non-current” or “dead” files.  These are the files you will need to hold onto but should not have to access on a regular basis.  Last, but not least, you should have a safe deposit box.  The safe deposit box should store any important documents that would be difficult, or costly, to replace.  Examples of files that should be kept in your safe deposit box include: Marriage Certificates; Birth Certificates; Adoption, Citizenship, and Divorce documents; Records of Ownership including; Titles to your Vehicle, Deeds your home or land; and any Stock and Bond certificates.  You should also keep your original signed will in the safe deposit box.  I advise that your attorney also holds a signed copy of your will.

Of course, in today’s world, it is becoming easier and affordable to scan your documents and have digital copies.  You should ensure that any of your personal digital files are secure and backed up, (CD, flash drive, or preferably remotely) should your hard drive either crash or be stolen.

What Files Should You Keep and How Long Should You Keep Them?

Each household will have unique requirements thus making their recordkeeping system fairly unique.  However, in most cases, your financial records can be sorted into six primary categories, or files. If you focus on getting these six categories organized, you will find you are well on your way to having an organized record keeping system in place.

Tax Document File

Your tax document file will contain anything you’ll need in order to prepare your tax return.  This file will hold all of your receipts and cancelled checks that relate to any deductions and credits. Your Tax Document File will also hold all of your W-2, 1099 forms, and any other miscellaneous income records.  You should keep all previous returns and supporting documentation in your “non-current” files for at least three years after the return is filed. The IRS generally has 3 years to examine your return after it is filed (if not filed, the return requirements remain open forever until filed).  However, to be safe, I highly recommend holding onto your actual tax return forever (helps proves your filing and has your earnings history) and keeping your supporting documentation for 6 years.

Download your Free Tax Organizer Worksheet.
This organizer will help you to summarize your 2008 tax information.

Banking Records File

When organizing your Banking Records, keep your checking and savings statements separate. My personal preference and recommendation is holding on to your banking records for a total of 3 years.
In most cases, you should save your statements, until you can double check them against the year-end 1099 Form the bank sends you detailing any interest earned. Normally cancelled checks can be discarded after 3 years, with a few exceptions. Checks that support tax deductions, like those for charitable contributions or tax payments, should be moved to your tax files and saved for as long as the suggested 6 years of supporting documentation for the returns they support. Keep indefinitely, and move to the appropriate files, all cancelled checks related to a home purchase, capital improvements to your home and non-deductible IRA contributions.

Insurance Policies File

Create a unique folder each type of your insurance policies.  It’s a good idea to keep a data quick reference sheet at the front of the folder that contains your policy number(s), your insurance agent’s name and contact information, the amount and type of coverage.  If you ever need to file a claim, you will be thankful that this information is readily accessible.

Investment Reports File

It is wise to keep a separate folder for each of your investment accounts.  Remember, you will have a capital gains tax when you sell stocks or mutual funds.  You will need to prove your profit and loss on the sold investment.  You should keep detailed records on purchases, commission charges, any reinvested dividends or capital gains (this is important as it increases your tax basis), as well as sales prices. At the very least, you need to keep this information for three years after you file the return reporting the sale. Although most brokerage firms will hold the transaction history for you, it is ultimately your responsibility to provide this detail should the IRS question you. Most brokerage houses provide a summary of purchases and re-investments every year.

Home Records File

If you own a home, you already know that this folder will be your largest.  You were probably given a folder from your title company when you closed.  This folder should hold all the closing documents, the sales agreements, copies of the mortgage statement as well as appraisals.  In addition to this folder, I would create a unique folder that contains all your home improvement paperwork.  Your capital improvement will increase the cost basis or your home and reduce the amount of your gain when you sell. Real estate profits are not taxable right now (assuming the profit is less than $250,000 or $500,000 if married), the law could change at any time. A third folder documenting all of your valuable home items may come in handy for insurance purposes.  You can also use either a digital camera or video camera to record your items.  You want to make sure you capture the item, brand, model number, purchase price, and estimated replacement costs.  I also think it is a good idea to record the serial numbers as well. Protect this CD-Rom/DVD in a safe deposit box or backing up the data remotely.

Retirement Plan File

Create a folder for all of your retirement plan files, including: Individual Retirement Accounts (IRAs), 401(k), and any pension plans. The folder should contain your enrollment forms, statements and contact information.

Personal Financial Overview

I would recommend keeping a summary sheet that documents your system.  This will provide a guideline should someone else need to access your files.  Provide copies of this summary to your family, attorney, and CPA.

Maintaining Your Records

Once you have created your organization system, you will find it fairly easy to maintain your financial records.  The key is to not let paperwork pile up.  Try to file as you receive new documents or at least once a week. Remember, when discarding personal files, be sure to shred them before putting them out with the trash.

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