The Best Ways to Organize Your Finances After Taxes
Your taxes have been filed, your return (hopefully!) is on its way, and you're itching to book a fun vacation to reward yourself. Though sifting through the massive piles of bank statements, insurance documents, and important receipts you've accumulated throughout the year might feel like the last thing you'd like to do, managing your tax records will pay off in dividends (especially when next year's tax season comes around). Keeping accurate records helps you with documentation and explanation of deductions or credits you claim on your return. If your tax return is selected for an audit and you cannot produce the correct documents, you may have to pay additional tax and be subject to interest and penalties. Not sure what to save, shred, or digitize? Use this simple guide to declutter your finances and stress less.
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What to Shred
If you’re one of the 54% of Americans who still get paper bank and credit card statements, shred them (along with receipts and bills) annually after you’ve filed your taxes, says Andrew O. Smith, author of Financial Literacy for Millennials. Most financial statements are easily retrieved online for at least five years. When it comes to shredding the statements, choose a shredder that can handle multiple sheets, staples, and paper clips.
What to Save and Scan
The Internal Revenue Service (IRS) recommends keeping all documents that may have an impact on your federal tax return, including bills, credit card and other receipts; invoices; mileage logs; canceled, imaged, or substitute checks; and proof of payments. That means keeping health insurance records and anything that's evidence of income (W-2s, 1099s), deductible expenses, or a tax credit (papers proving tuition or childcare payments or retirement-plan contributions).
Be sure to keep hard copies and scan vehicle titles, real estate or property records, and insurance policies for as long as you own them. You should keep indefinitely: birth, marriage, and death certificates; Social Security cards; health care proxies; and wills. Store hard copies in a safe-deposit box or fire-resistant safe. Consider a portable scanner that allows you to scan directly to an online account. Save scans using a service such as CertainSafe (free 30-day trial then $12 per month for 100 GB) or Dropbox (free for 2 GB of space).
How to Go Paperless (the Safe Way)
Protect access to online financial accounts with a password you change every three months. Apps such as Dashlane (free for one device or $5 monthly for unlimited devices) or LastPass (free or $36 annually for premium features like file storage and priority tech support) help you do that. Keep a record of passwords in a safe place so your accounts can be accessed in an emergency, says Nancy Coutu, certified financial planner and cofounder of Money Managers Financial Group in Oak Brook, Illinois. Consider a separate email address for statements and bills, and review them monthly so you can spot fraud as soon as possible.
How Long Should Tax Returns Be Kept?
Stick with the seven-year rule even though your audit risk lasts only three years from the date you file. What qualifies as a tax record? Anything that's evidence of income (W-2s, 1099s), deductible expenses, or a tax credit (papers proving tuition or childcare payments or retirement-plan contributions). Also, keep health insurance records. Keeping copies of your tax return can help you prepare future tax returns and will be needed to file an amended return. You also might need them for loan applications, to estimate tax withholding, or because records were destroyed in a natural disaster or fire. And don’t forget you aren’t the only one who might need your return; the executor of your estate may find the records helpful.
Finance Apps to Keep You Organized
Take your finances paperless to help ease the load of physical documents that add up (and take up space on your kitchen table) with these easy-to-use apps.
Doxo: Want to take the guesswork out of bill pay? Schedule and track payments, plus review accounts and documents from your smartphone, all for free with the Doxo app.
ItsDeductible: This is another free app that keeps track of donations, assesses the value of donated items, and allows you to scan all your charitable receipts. The ItsDeductible app is only available for iOs, however, anyone can use the free online version.
With these decluttering tips, you'll be able to downsize paper pileups, digitize, and get organized for next year's tax season. Trust us, your future self will thank you.