How to Make Tax Filing Easier With a Recordkeeping System

Recordkeeping Tips That Could Save You Time and Money on Your Taxes

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Do you dig frantically through piles of papers when tax time rolls around, looking for the records you need to prepare your tax return? Are you unsure which records you should keep and which ones you can safely throw away?

You can make your life easier and ensure that you don't miss any tax deductions or tax credits if you organize your recordkeeping system early in the year and keep it up to date.

Key Takeaways

  • Having accurate records can be key if the IRS questions your deductions and your eligibility for any tax credits you claim.
  • You should have invoices, receipts, or some other type of written record of any expenses for which you're claiming a tax deduction.
  • Electronic records are also acceptable, such as credit card or bank statements you download or access from the lender's or bank's website.
  • You're required to maintain your records for three years from the date you file your return. But six years can be a safer rule of thumb. The IRS has this long to audit you in some cases.

Why You Should Keep Records

People are much less likely to keep all their relevant records in one place when much of their financial lives exist online or in electronic form. This isn't to say that the recordkeeping methods you adopt can't be electronic. But it should be set up so that everything you need is located in one secure place.

Invest in a water- and fire-proof safe if you keep paper records, or think about keeping copies in separate locations. Scan the records you have in hard copy if you decide to go digital. Be sure to keep your digital records and files secure. Make sure you have a backup.

Not only will these measures make it easier to file your tax return, but they'll also help ensure that you claim every tax deduction or credit you're eligible for. Keeping records enables you to explain an item on your return if the Internal Revenue Service (IRS) questions you about it in an audit.

Note

The end result could be a higher tax bill if you're audited and the IRS questions a credit or deduction that you can't back up with proof.

Keeping accurate records can get you all of the tax benefits you're eligible for. It can prevent you from having to pay additional taxes and penalties for unsubstantiated items.

What Records Do You Need?

Your checkbook, personal budget software, and online banking tools can all help you remember income and expenses that should be reported on your tax return. But the checkbook or software alone aren't enough to prove the deductibility of your expenses.

You should have invoices, receipts, sales slips, or other written records that spell out exactly what you paid for, in addition to proof of payment such as canceled checks and credit card receipts. Some itemized deductions that you should document in this way include charitable contributions, mortgage interest, and real estate taxes. Get a dated and signed receipt showing the total amount and an itemized description of what was purchased if you make payments in cash.

You should be able to determine your basis and whether you have a gain or a loss when you sell stocks, bonds, and mutual funds. This will help to prove that you correctly claimed any income you earned. Your records should show the purchase prices, sales prices, commissions, dividends received in cash or reinvested, stock splits, load charges, and original issue discount (OID).

Note

An Excel spreadsheet is a great way to track investment information. But even a statement from your broker or financial advisor or a handwritten schedule will do.

Be sure to keep your pay stubs as proof of payment if you have deductible expenses withheld from your paycheck. These might include union dues, medical insurance premiums, or 401(k) contributions. These can be paper versions or electronic versions if your employer offers those.

The Most Common Records to Keep

These are some of the most common records you should keep and that you should request if you can't locate them or never received them:

  • W-2 and 1099 forms
  • Bank statements
  • Brokerage and mutual fund statements
  • Form K-1 (for partnerships)
  • Sales slips
  • Invoices
  • Credit card receipts
  • Canceled checks or other proof of payment
  • Home purchase and sales agreements, closing statements, and insurance records

How Long Should You Keep Records?

You should keep records for at least three years from the date you filed your original return, but it doesn't hurt to keep a copy of your actual tax returns, W-2s, and 1099s indefinitely. You or your heirs might need information from the returns at some point, and you might eventually have to prove your earnings for Social Security purposes.

You should keep records for three years from the date you filed your original return or for two years from the date you paid the tax, whichever is later, if you file a claim for credit or refund after you file your return.

The IRS can extend the look-back period up to six years in certain cases if you're audited. Having a lengthy and accurate paper trail can prove vital if you're subjected to an in-depth audit of your prior years' tax filings.

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Sources
The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
  1. IRS. "How Long Should I Keep Records?"

  2. IRS. "IRS Audits."

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