Clutter can be dangerous – especially when it involves your finances. When your financial documents are cluttering your desk or spread across your home, it can be easy to lose the ones you will need for tax season, it can be easy to toss them in the trash where dumpster-diving thieves can collect them and steal your financial identity, and it can be easy to simply be distracted by the mess and miss payments or opportunities to secure your money.
Keeping your financial documents organized and neat takes only a few short minutes each week once you know what to keep and what to toss. Stop right now…if you don’t already have a shredder, go out and buy one right now — I recently got mine at Staples. Then, we’ll work on which documents can be tossed and which you have to keep and for how long.
Let’s get started.
Keeping the documents recording purchase price and the cost of permanent improvements is important because those expenses are added to the original purchase price to establish the home’s cost basis. These expenses reduce your overall profit and help keep your capital gains tax in check when you sell your home.
Why six years? The IRS keeps three years’ worth of returns on hand for everyone. They use these to look for errors and verify any big changes. They have up to six years to challenge your return if they suspect under-reported income. There is, however, no limit on how many years they can ask you to go back if fraud is suspected or if you failed to file a return.
… and as you put the latest one into the folder, take the oldest one out and shred it.
Keep those until the warranty expires (if it has a warranty) or as long as you need them for tax purposes. For clothing or other returnable items, hang onto the receipt until the return period has expired so that if you change your mind, you have the receipt.
Now, with a simple system established, you will be ahead of the game when it comes time for tax season. Each week, as you examine statements, you’ll know your current financial status and keeping track of that is invaluable.
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