Keeping a good paper trail of your financial transactions is essential. However, with time you may realize that your paperwork keeps piling up and may present a challenge when searching for documents.
One way to ensure that your financial paperwork remains organized is by disposing of what has outlived its purpose. But how do you know what to keep and what to throw away?
If that is your concern, worry no more. Here are some critical financial documents that you may want to keep and for how long.
A pay stub is one of the essential documents that you will want to keep. It is often issued by employers to show employee’s payment information, including earnings, taxes, deductions, and employee contributions.
In most cases, employers use accounting and payroll software programs like Xero to create check stubs. However, small-business owners can opt for a simple online paystub creator to generate pay stubs for their employees.
While employers are legally obligated to issue employees with pay stubs at the end of a payment period, employees can still get one on demand, even in states where it is not mandatory. A good rule of thumb is to hold onto your paystubs for a year or until you receive your annual W-2 form from your employer and confirm that the pay and tax amounts are accurate.
Medical bills can generate a significant amount of paperwork, especially if an illness takes a long time to treat.
According to the Federal Trade Commission, it is recommendable to keep your paid medical bills for at least a year before getting rid of them. However, if you have unresolved insurance claims or disputes, you may want to hold on to your medical bills until the claims or disputes are settled.
You may also want to keep your medical bills for tax purposes because medical expenses are sometimes eligible for tax exemptions.
Any form of documentation relating to taxes must be appropriately kept for several years.
For instance, the IRS has a three-year statute of limitation on tax audits if it detects good faith errors in your tax returns. That means you should keep your tax records for at least the same period or until you can support your income, credit, deductions, and exemptions in the event of a dispute.
However, if the IRS has evidence to suggest a gross income underreporting of more than 25%, the audit can be backdated as far as six years from your due date. In other words, seven years should be the minimum for holding your tax documents to be on the safe side.
If you are a property owner, records relating to the ownership of that property are vital and should be well kept and maintained as long as you retain ownership.
Additionally, any substantial improvements on your property, such as home improvements and remodeling projects, must be documented as they impact the property’s value. It is also crucial to keep the records of all expenses incurred in the purchase or sale of your property, such as legal fees and commissions, because they will be a factor when calculating your capital gains.
After disposing of a property, financial experts recommend that you hold on to your records for at least seven years in line with the IRS audit timeframe.
If you use a flash drive or the old-fashioned filing folders to store your documents, you should get rid of the unnecessary records only when you are confident you will no longer need them. However, you may want to consider cloud storage to help you store files indefinitely.