On the heels of the Tax Season 2010, we here at Bakken & Associates CPA thought it would be helpful to offer some tips to our loyal clients that can help you get a jump start on your tax and financial planning.
Start a Filing System
One of the best ways to ensure your financial records are in order is to start a filing system. Find a good spot for your current files then as you receive important documents, store them in the appropriate files, as you go. Any type of container such as a filing cabinet, plastic box, accordion file or banker’s box will suffice.
What to Keep/What to Toss
Tax Documents – This file should contain any item you will need to prepare your 2011 tax return including:
W-2, 1099, K-1
Sales slips, invoices and receipts
Cancelled checks and other proof of payment
Purchase and sales invoices
Proof of payment
Form 2119 (if you sold a home before 1998)
Home improvement records and their associated costs
Mutual fund statements
For(s) 1099 and 2439
How Long Should I Keep?
Your tax returns and supporting documentation from previous years can be placed in your dead storage area at least until the chance of an audit passes. The IRS generally has three years to examine your return though the limit increases to six years if the agency believes you underreported income by more than 25 percent. No limit exists if you failed to file or filed a fraudulent return. To play it safe, Bakken & Associates CPA advises you to keep your tax returns for six to 10 years.
Keep separate files for checking and saving statements. In most cases, you should save your statements for a year until you can double check them against the year-end 1099 Form the bank sends you detailing any interest earned.
Cancelled checks can also be discarded after a year, with a few expectations. Checks that support tax deductions, like those for charitable contributions or tax payments, should be moved to your tax files and saved for as long as you keep the returns they support.
Investment records have a long shelf like, so it’s important to keep them in a safe and separate file; each account having its own separate file folder. The sale of a stock or mutual fund triggers a capital gains tax bill and you must be able to substantiate your profit or loss on the investment. To do so, you need detailed records on purchases, commission charges, any reinvested dividends or capital gains, as well as sales prices. At minimum, you must keep this information until three years after you file the return reporting the sale.
Retirement Plan Information
Be sure to keep files on all of you retirement plans including Individual Retirement Accounts (IRAs) 401(k) plans, and any employer pension programs. Each should contain enrollment papers, statements and contact information.
Copies of all current insurance policies should be maintained in separate files, containing policy numbers, issuing companies, the agent’s names, amount of your coverage as well as the names of those covered and beneficiaries. If you need to file a claim, you will appreciate having this information at your fingertips.