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5 Steps to Declutter Your Finances and Tax Records

Confused about what tax records and financial paperwork you need to keep and for how long? Money Girl Laura Adams helps you declutter your financial life, manage your tax records, and stay organized in 5 easy steps. 

By
Laura Adams, MBA,
Episode #579
5 Steps to Declutter Your Finances and Tax Records

Step #4: Digitize Your Taxes

What you may not realize about taxes is that the IRS allows you to keep digital copies of both the return and your backup for the income, deductions, and credits you claim. The rules are the same for paper and digital records.

Generally, individuals need to keep tax returns and the supporting documents for a minimum of three years.

Generally, individuals need to keep tax returns and the supporting documents for a minimum of three years. That’s because you generally have up to three years to file an amended tax return or to be chosen for an 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, I recommend holding a return for seven years.

Be aware that IRS says that if they suspect fraud, there is no statute of limitations for how far back they can audit you. So, if you’re an honest taxpayer, keeping records for three years is sufficient. But digital files are so easy to keep, there’s no downside to holding them longer. Every year you create another paper tax return, make a goal to digitize it instead of filing it.

Also, the rules for business records retention are different than for individuals. You typically need to keep business taxes for a minimum of seven years. But they can be digitized too.

Try a free scanning app, such as Genius Scan, on a mobile device. It’s loaded with 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 DriveDropbox, and Evernote.

If you have stacks of paper to scan, a traditional flatbed scanner with a document feeder will save time. Many inexpensive printers have built-in scanners that send files to your computer or email. There are portable scanners that even integrate with a variety of could services and accounting software, such as QuickBooks and TurboTax.

Step #5: Manage Your Digital Files Wisely

Once you begin accumulating e-documents, you’ll need to keep them organized and secure. Create a digital filing system, such as folders and sub-folders on your computer desktop, plus at least two backup locations.

Use naming conventions that include the company or category name, month, and year, so it's easy to search and find any document quickly. For instance, you might have a sub-folder for paychecks, investment statements, trade confirmations, tax-deductible items, insurance, or any type of document that you might need in the future.  

You can add a layer of protection by requiring a password to access your main folder. Also, keep your computer’s operating system and security software up-to-date to ward off cybercriminals.

It’s a good idea to store important e-documents in multiple places so your information could never be lost in a computer crash or a fire. For instance, keep digital records on your computer, an external hard drive, and in the cloud—to make sure you never lose any data. Those backups will be a lifesaver if your computer dies or disappears.

Yes, storing sensitive information electronically means you could be hacked. However, the advantages of digital docs far outweigh the downsides, especially when you take smart precautions like password protection on your devices and external drives.

Remember that identity theft commonly occurs when thieves steal snail mail and paper containing confidential information. So, going digital can also reduce the likelihood of a thief intercepting your sensitive information.

Once you create a plan for storing your paper and digital documents, make sure your family or loved-ones know how to find important documents if you weren’t around.

Make getting financially organized a priority right now. You’ll feel more in control of your finances, eliminate expenses, and save time—so you can spend it doing something you enjoy.

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