Are you still
saving piles and piles of financial documents that clutter up your home? Most
of us are, but that doesn’t mean you need to. You can get rid of much of that
space-hogging mess with the help of your computer and a few simple strategies.
Here’s how to
decide when you need to keep paperwork…when to shred it…and when saving digital
copies is a viable option…
What to Keep
Tax records. The IRS generally has three years to launch an
audit, but that window opens to six years when income is underreported by 25%
or more…or seven years when a loss from worthless securities or bad debt is
reported.
The availability and acceptance of digital records
have changed dramatically in the last several years. The IRS now readily
accepts scanned and digital images of receipts, tax forms and other supporting
documents. The IRS now even requires many tax returns to be filed electronically.
The prevalence of thermal-print cash register
receipts, where the text quickly fades, makes original receipts unreliable
backup for the future. (When thermal receipts are exposed to high heat, such as
in a warm car trunk or in a box in the attic, fading occurs at an even more
rapid rate.) Digital records, including e-mailed receipts, are more stable and
likely able to support taxpayer claims in the future.
After three (or up to seven) years, you can
delete (or shred) most of the supporting documents, but keep the return itself,
plus any W-2s and documents detailing retirement account contributions. Save
these until you start receiving Social Security payments and withdrawing money
from your retirement plan. They could come in handy if there’s a dispute about
your Social Security or retirement plan contributions.
Save utility bills with your tax documents only if you take a home-office deduction using the “Regular” method or treat real estate as rental property. The expense could be tax deductible. Otherwise, you can toss those old utility bills.
See below for tools to make it easy to create
and store your records and receipts digitally.
Investment account statements. Keep the annual summary account statement and shred monthly statements after verifying that the annual records each security’s cost basis. (IRS regulations now require brokers to maintain the cost basis records for clients.) Unfortunately, if you owned securities before the enactment of the rule in 2011 or have transferred holdings between brokers, this information is more likely to be lost, so you may need to keep older records on those. These records can all be stored digitally.
Do keep original stock certificates and savings bonds. And be sure to maintain the Form 5498, IRA Contribution Information, to support IRA contributions and distributions.
Vital life documents. Keep originals of things such as certified copies of birth
certificates, death certificates, marriage license and divorce decrees,
although it’s a good idea to have digital copies as backup and easily accessible
for cases when originals are not required.
Home and other real
estate documents. Hold on to these documents a few years longer than you own the
property—to support cost basis for the property and avoid legal issues. For
example, having maintenance records will help you defend against a lawsuit from
the home’s next owner claiming the house had a problem you failed to disclose.
The records to save include mortgage documents
signed at closing…federal truth-in-lending disclosure statements…current
homeowner’s insurance contracts…title insurance documents…warranty
deeds…receipts from major work done on the home…home inspectors reports…any
additional paperwork received at closing…and the deed of release when you pay
off your mortgage.
In this category, the move toward paperless
storage is enormous. But keep originals of anything that is notarized or has an
official seal.
Insurance records. Digital copies of
policy statements are most commonly available for auto and home policies.
Issuers often offer discount incentives to policyholders who move to paperless
billing and policy statements. Life insurance, long-term care and other
specialty insurance issuers also may provide digital records. The key in
maintaining these policy types is ensuring that a digital file includes any
updates or policy revisions.
Verify with your home state if a digital copy
of an automobile insurance card is sufficient in case of an accident or if
stopped by the police. Nearly all states now allow the insured to provide a digital-format
proof of insurance.
Car records. Keep receipts (digital is fine) related to auto maintenance and repairs as long as you own the vehicle. These could establish that you have lived up to the terms of the car’s warranty or help you convince a buyer that you’ve taken good care of the car when you sell it.
What to Toss
Sales receipts
and ATM slips. It is OK to skip the register receipt as long as you do not need
it to support your case. Prime examples of tossing include forgoing a printed
receipt from your daily lunch or java purchase.
What about higher-dollar purchases? A good
rule of thumb is to ask yourself, How likely and willing am I to follow
through on a warranty claim or return? If the answer is unlikely or never,
then trash the receipt and move on. A modern alternative to holding paper
receipts is to use a smartphone app to snap an image of the receipt before
tossing it into the trash. Or choose to have the store e-mail your receipt.
The New Digital Storage Options
Sign up for digital delivery of
investment and retirement account statements rather than having to convert
paper to digital format. The typical household all-in-one
printer/scanner is fine for scanning the occasional page, but it’s much too
cumbersome to use regularly.
If you are just too busy to routinely download or access your digitally delivered account statements or bills, automation tools such as HubDoc or FileThis can take care of the task. A tool I love for converting something from paper to a digital format is the ScanSnap ix500.
If you struggle with converting paperwork or receipts, there are a variety of services dedicated to solving that drudgery, including Shoeboxed, Expensify and Neat. They can assist with getting rid of paper clutter as well as addressing your fear of losing a vital document.
Consumer-friendly tools such as DropBox, Evernote, CamScanner and Adobe Scan let subscribers snap photos, convert them to pdf and quickly upload to cloud storage.
Good cloud storage options include Google Drive, Apple’s iCloud and Amazon.com (Prime members can snap photos to store receipt images, files and other records). These services are free for a set amount of storage, but you can buy up for additional storage.
Smart: Pick one cloud storage
tool and stick with it for the entire calendar year. If you want to switch
platforms, make the transition at the start of a new year. That way, you only
have one storage location per tax year.