Financial record keeping for individuals and households

We need to keep records and documents for various purposes, including tax, legal, emergencies, and references for family. It is important that we know what to keep and for how long. By keeping good records, tax returns, tax audits, legal situations, and emergencies can be handled with less stress. In this post, I will focus primarily on records relating to taxes and finances.

Where and how should I keep the records?
For some legal documents, you should consider placing them in a safety deposit box, with copies at home. But for most records, you can keep them at home. I recommend using softwares to help with bookkeeping, and keep the paper records in folders separated by category. If you have enough records, you may want keep the folders in boxes, separated by year.

What records to keep and for how long?
Generally, tax-related records need to be kept for 3-7 years. I keep them for 7 years just to be safe. For other records, it's really up to you how long you want to keep them. Please refer to IRS Publication 552: Recordkeeping for Individuals for more information, or consult your accountant and attorney for their recommendations.

Tax returns (IRS Form 1040)
The IRS can come back and audit you between 3-7 years after you file a return, unless you commit tax fraud or evasion (for which there's no time limitations).

Income records
You need to keep records on sources of income and whether it is taxable or non-taxable income. Here are some income record examples:

• Pay slip: Keep them until you have received the end of year wage and tax statements (IRS Form W-2). Shred them after you have confirmed the statements are correct.
• Wage and tax statements (IRS Form W-2): Keep with your tax returns. You may want to keep indefinitely for the protection of your Social Security benefits.
• Income as independent contractor (IRS Form 1099).
• Income from flow-through entities, such as limited partnerships, S corporation, limited liability companies (IRS Form K-1).
• Income from partnerships (IRS Form 1065).

Expense records
You must keep records for expenses for which you claim tax deductions and credits, and retain them for 3-7 years. Generally, you will need to keep invoices, bills, receipts, or other proofs of payment. If you do not claim tax deductions and credits, you do not need to keep them for tax purposes. Here are some expense record examples:

• Business expenses: Never mix business expenses with personal expenses. Please refer to IRS Publication 583: Starting a Business and Keeping Records for more information, or consult your accountant and attorney for professional advice.
• Charitable donations: Not all donations are tax deductible. If they are tax deductible donations, keep the receipts. Otherwise, you can throw them away.
• Medical records: If they aren't used for tax deductions, you do not need to keep them for tax purposes. Your insurance policy, however, may require you to keep longer records, so check with your insurer.
• Utilities bills (telephone, gas, electricity, water, etc.): You can dispose of them after payment. I keep them, however, for tracking seasonal variations in utilities expenses (e.g. gas heating in winter, electricity for air conditioner in summer).
• Other notes:
• Receipt of items under warranty: Keep with product manual and warranty. Dispose with warranties upon expiry.
• Most receipts (dining, entertainment, groceries, etc.): Throw them away after you've done your bookkeeping.
• Credit card slips: Keep them until you get your credit card statements. If they match up, you can discard them (though I keep them for approximately 3 months before purging).

Financial records

• Bank statements (savings, checking, and credit cards): I don't think there's a requirement to keep them, but I keep them for at least 3 years. I think it's good to have some financial history on hand.
• Mortgage statements: Keep them for tax purposes.
• Credit reports: Order your credit reports annually. You are entitled to a copy each year for free. Check them for accuracy.
  
• Budgets: Keep them for 1-3 years to see how well you keep to budgets.
• Personal financial statements (income statement and balance sheet/net worth statement): Keep them for indefinitely to track your financial progress.

Property records
You should keep your property records for 3-7 years from the date of you sell the property. These are important for tax deductions and capital gains for tax returns.

• Closing documents.
• Purchase and sales invoices.
• Proof of payment.
• Insurance records.
• Mortgage statements.

Investment records
Your records should cover all your investments, including bonds, stocks, and mutual funds. You need to be able to determine your cost basis, expenses, and gain or loss on investments from your records. You should record all "hidden" transactions, such as reinvested dividends, stock splits and dividends, and load charges. Unless otherwise stated, you should keep investment records for 3-7 years after you have sold the investment. Examples of investment records:

• Brokerage statements: Though not required, I keep them indefinitely so I can see how I performed with my investments.
• Mutual fund statements.
  
• Retirement account statements: Keep these indefinitely, especially if you have a mix of tax-deferred and after-tax retirement accounts. Keep track of whether tax has been paid, or you may accidentally pay taxes twice!
• Tax statements for dividends and distributions, interest income, etc. (IRS Form 1099).
• Capital gain statements (IRS Form 2439).

Legal documents:

• Social Security cards: Retain indefinitely.
• Wills and trusts (copy): The originals should be at the attorney's safe, with a copy for your records. Be sure to keep your Wills up-to-date, especially with life changes like marriage and divorce.
• Deeds and titles: Retain for 3-7 years after disposal of assets.
• Home content inventory: Keep them up-to-date for insurance claims.
• Bonds and stock certificates.
• U.S. Savings Bonds and U.S. Treasury Securities: Make sure you're still collecting interest on them. If not, redeem then buy new ones.
• Rental lease: Retain for the duration of the lease plus 3-7 years. (In Taiwan, renter's rental expenses are tax deductible. Owners need to keep records accordingly, as the tax office will match your rental income to the renter's deductions claimed.)

Other documents

• List of bank accounts, brokerage accounts, and credit cards: This list should include bank contact details, account numbers, and card numbers. You'll need these if you loose anything. This will also be useful for your executor to settle your estate.
• List of insurance policies: This list should include insurer contact details, policy number, and brief policy information. This will help your family understand your insurance coverage in case of emergencies. If you lose your policy, you can use this to ask your insurer for another copy.
• Personal insurance policies (life, medical, and disability): Keep them handy. If you do lose them, ask your insurer for a copy. Revoked or expired policies may be disposed.
• Inventory of safety deposit box and key.
• Product manuals and warranties: Keep with receipts. Dispose of expired warranties.

Related posts:

• Keep track of your financial progress.
• Preparing your financial statements.
• Analyzing your financial statements.
  

References:

• IRS Publications:
• Publication 552: Recordkeeping for Individuals (PDF).
• Publication 583: Starting a Business and Keeping Records (PDF).
• General Services Administration: Federal Citizen Information Center: Keeping Family/Household Records.
• Bankrate.com: Tax record-keeping tips.
• Extension.org: Organize Your Important Papers.
• LifeOrganizers.com: Records Retention.

P.S. This post was featured in The Money Hacks Carnial #12 at Can I Get Rich On a Salary.