Spring Cleaning – How long should I keep financial documents?

The days are getting longer and the weather is starting to warm up which means spring is just around the corner.   While spring brings with it many fun activities it also brings along the dreaded spring cleaning.   Part of my cleaning routine it to get rid documents that I no longer need, which brings up the important question of how long should you keep certain items.   This month’s blog will address those questions along with the best ways to store important records and dispose of ones you no longer need.

Tax Documents

Most experts agree that you should keep tax related records for seven years.  The Internal Revenue Service (IRS) can audit you for three years after you file your return if it suspects an unintentional error, and the IRS has six years to challenge your return if it thinks you underreported your gross income by 25 percent or more.  In addition to keeping the actual tax returns it is important to also save the supporting documents for those tax returns.   For example, you should keep cancelled checks for any deductions you took on your tax return.   If you have questions about what documents to retain it is best to speak with your tax professional.

Property Records

Homeowner’s should keep documents related to the purchase or sale of a home, as well as records of any significant improvements (remodeling / additions) for at least 6 years after the home is sold.   This is important if you have a taxable capital gain from the sale of the home and need to verify it for tax purposes.

Investment Statements

It is best practice to keep quarterly investment statements until you receive an annual summary.  The annual investment statements should be kept for at least 3 years after you sell the investment.

Business Records

As with your personal tax documents it is a best practice to keep business records for at least 7 years.  These documents should include:

  • Business income tax returns and supporting documents
  • Employment tax records (Only 4 Years)
  • Business asset records
  • Business ledgers and other key documents
  • Human resources files (Worker Comp records – 10 years)
  • Bank accounts and credit card statements

If you have questions about which documents to keep you should consult your tax professional or attorney.

Documents to keep forever

Copies or scanned images of legal papers may not be considered valid so it is important to keep originals of these documents:

  • Marriage licenses, divorce papers, and custody decrees
  • Birth certificates, adoption papers, and death certificates
  • Records of paid mortgages
  • DD 214 (Certificate of Release or Discharge from Active Duty)

Where should you keep financial records?

To store paper copies of your financial records consider getting a Fireproof / Waterproof safe.   There are many options that will hold hanging files available for under $200.   Increasingly people are turning to paperless statements and an external hard drive is an option for storing copies of those statements.  Since the IRS will accept legible electronic records keeping digital copies of your important financial information is a great way to keep records without taking up a tremendous amount of room.   Make sure that your external hard drive is encrypted and password protected.

How should I dispose of record I no longer need?

Shredding documents is an effective way to dispose of sensitive information that you no longer need and if you choose to do it a home make sure you use a crosscut shredder. The downside to many of these home shredders is there limited capacity which means it could take a while to destroy a large amount of papers.  If you do have a significant amount of information that needs to be destroyed you may want to consider utilizing a document shredding service.  To find a list of document shredding services near you visit the National Association of Information Destruction (NAID) Directory.

Good luck with your spring cleaning and please reach out to your Oakworth Client Advisor if you have any questions about which documents you should keep and for how long.

Oakworth Capital Bank does not provide tax or legal advice.   All decisions regarding the tax and / or legal implications of these strategies should be discussed with your tax and / or legal advisors before being implemented.