What to keep and what to toss are always a question when organizing, especially when working through papers and documents. Here I discuss the IRS recommendations for record retention and how to implement them in your home.
My first recommendation is to set up a filing system with tabbed hanging file folders and labeled manila folders. This makes sorting documents SO MUCH EASIER! I use a customizable color-coded categorical system for my clients, but even just labeling a few folders will help.
My second recommendation is to understand the difference between house management and record keeping. House management includes budgeting, reconciling accounts, bill payment, etc. Record keeping is maintaining important documents that you might need for substantiation of your tax, legal, medical, or personal records. With this understanding it is a lot easier to weed out documents that you don’t need to store long-term, like grocery or clothing receipts. (Again if you use those receipts for tax purposes then please keep them however make sure to discuss this type of deduction with your tax accountant.)
Now what to keep and for how long. The first point of reference is the IRS record retention guidelines. The important point to note is that the period of limitations that the IRS can impose additional tax or offer you a credit is 6 years. This is if you haven’t filed a fraudulent tax return or never filed at all, then there is no limitation with which you can be audited. Therefore it is a good idea to keep tax substantiation records for 7 years (current year plus 6). However most CPAs recommend keeping your tax record permanently. The good news is this is actually a small amount and can fit in one manila folder for the average household.
Another thing to consider when storing records is whether you need them for insurance or legal matters. I recommend keeping insurance explanation of benefits for 2 years. This allows any billing questions or concerns to be addressed. If after reviewing your statements you determine that you can deduct your medical expenses then file your medical statements and explanation of benefits with your tax documents, in other words 7 years. To learn about what records are required for tax substantiation please visit Health Record Retention.
Julie Morgenstern wrote a great article in O magazine about household record retention listing individual items and their retention time including household management documents. Below is a quick table featuring some of the information in that article.
Each situation is unique so I hope that I’ve given you at least some information to start the process. And feel free to ask any questions you might have in regards to records retention or organizing!