Recordkeeping for Individuals

Recordkeeping for Individuals – Can You Locate Key Documents?

here Proper recordkeeping for individuals is a worthwhile endeavor. It can save both time and money. Not to mention the added benefits of reduced clutter and stress.

You need to know what records to keep and how to organize them. In addition, records should be safe and relatively easily accessible by you and certain other trusted individuals. You also need to know when it’s okay to dispose of certain records or documents.

Where Should I Keep My Records?

On-site options generally include cabinets, desk drawers, accordion folders, binders, boxes, or a safe inside your home.

For off-site, one popular option is electronic (“in the cloud”) storage. It is very affordable, safe, and convenient. Although to use it more fully, you may wish to purchase a scanner as well. Another off-site option commonly used is a safe deposit box at a bank.

Most monthly statements and year-end tax documents these days are easily downloadable and saved electronically. This is great because these are the papers that typically accumulate quickly and create clutter and reduce physical storage space. For items stored online, you may also want to consider having an extra backup locally on your computer or another storage device.

Keep originals of important permanent documents in a home safe or a safe deposit box at a bank. Such documents may also be scanned and stored online in addition to safekeeping the originals.

Replacing certain documents typically requires a fee. Not to mention the time period you may have to wait until you receive a replacement (possibly during an emergency).

Make sure that any safe used inside your home is fireproof as well as waterproof. Also make sure it is bolted down to the floor or wall, especially if it is small or lightweight and easy to carry.

Don’t Keep Your Home Safe or Bank Safe Deposit Box A Secret

Further, with a safe deposit box at a bank or a safe at home, you must make sure you tell trusted individuals such as a spouse or child about its existence. Also make arrangements for such individuals to be able to access it if you cannot due to disability, death, or some other reason.

A safe deposit box at a bank can be rented jointly with a spouse or child, for example. Or you may be able to name your living trust as a co-lessee of the box. In such a case, the successor trustee of the living trust will have access to the box. You may also give someone access through a power of attorney. Without such types of arrangements, a court order may ultimately be needed for others to gain access.

With a home safe, make sure someone you trust will have access to the combination if you are not around or cannot otherwise open it.

Recordkeeping for Preparation of Individual Tax Returns

It is important to have adequate records in order to prepare complete and accurate tax returns. Besides reporting the proper amount of income, such records can help you claim all the tax deductions and credits to which you are entitled.

These records can also help you respond to tax notices from the government, and to provide support for items in an audit. Even if you have a professional prepare your tax return, you will need to provide the required records and documents.

Generally, you should keep copies of tax returns and all documents which support information reported on them until the relevant statutes expire. This is generally 3 years after filing. Filings before a tax deadline are considered filed on the due date.

However, if you do not report more than 25% of your gross income, the IRS has 6 years to audit you. If you never file, or if you file a fraudulent tax return, there is no statute of limitations as to when you can be audited. For tax returns on which you claim a loss for a worthless security or bad debt deduction, the statute is 7 years.

Also, (if applicable) don’t forget to keep any forms 8606 (Nondeductible IRA Contributions) in your permanent file. This form tracks your basis in a traditional IRA, and can help you determine what percentage of your ultimate IRA distributions will be taxable.

For a fee, you can request a copy of a past tax return from the IRS by using Form 4506If you want the information from a tax return but not the return itself, you can order a transcript

Tax Documents

Individuals should keep the following records supporting items claimed on their tax returns. 

  • Receipts 
  • Credit card statements
  • Bank statements
  • Invoices
  • Bills
  • Canceled checks or any other proof of payment
  • Mileage log and travel diary
  • Other workpapers or schedules used in preparing your tax return – Examples include summarizing worksheets, combinations of expenses into categories, etc.
  • Any other records that support income, deductions, credits, or other information reported on your tax return

Records relating to property should be maintained until the statute expires on the tax return year in which the property was disposed.  Examples include:

  • Closing statement summaries for purchase and sale of real estate
  • Receipts for expenditures to improve real estate
  • Stock and other investment  documentation indicating purchase price, reinvestments, sale, etc.

A software program called Shoeboxed can help you to scan and organize receipts. It also has a mileage tracking feature for tax deductible auto use.

With regard to paystubs, always keep the two or three most recent on hand. You may need them for income tax projections, or to prove income when applying for a loan or leasing a car or apartment. Otherwise, you can dispose of the rest upon receipt of your annual year end statement such as a W-2 or 1099-MISC.

Tax Records For Small Business Owners

More and more individuals these days are starting their own businesses. Examples of tax records small business owners should keep include:

  • Income – Cash register tapes, bank deposit slips, receipt books, invoices, credit card charge slips, and Forms 1099-MISC
  • Expenses – Canceled checks, receipts, account statements, invoices, credit card statements
  • Capitalized assets – Invoices, real estate closing statements, canceled checks

Small business owners must also keep any employment tax records for at least four years after the related tax becomes due or is paid, whichever is later.

Recordkeeping for Financial Analysis

Many of these same records that you use for income tax preparation can also be used for financial analysis purposes. The information can be categorized and summarized to facilitate budgeting. Then you can see more clearly where your money is coming from and where it is going.

If you do this monthly or at the very least annually, you will be able to see any trends. This can allow you to be proactive and to avoid getting into debt, for example. Debt management is much easier when you have summarized records of your earnings and spending activity. Being able to see the “big” picture is key.

Besides this, you can create a net worth statement. You do this by listing and totaling the value of everything that you own (assets). Then you subtract from this number the total value of everything that you owe (all of your liabilities). The difference is your net worth. Tracking the trend of your net worth along with your periodic income and spending habits can also help you to better plan for retirement.

Such data can help you to determine if you are on the right track in accumulating the funds that you will need for retirement. If not, it can be a guide as to what types of changes are needed.

What Other Records or Documents Should I Keep?

For preparation of tax returns and financial planning and budgeting, you generally need the items listed above. These include bank, brokerage, and credit card statements, receipts, etc. But there are also other records and documents you should keep safe and handy.

Such documents may be needed for several different purposes such as identification, travel, proof of ownership, insurance claims, estate administration, employment or government benefit applications, etc. Below are some examples.

Indentifying Documents

  • Birth certificate – A personal identifying document which may be needed for many purposes such as getting a passport or driver’s license, applying for government benefits, or replacing a lost Social Security card. There is usually a fee for a replacement certificate.
  • Social Security Card – Another fundamental personal identifying document. It provides proof of your social security number. Although there are other ways an employer or bank, for example, can verify your social security number, it is wise to keep the card handy just in case you are asked to produce it. There is no fee to replace.
  • Passport – A key identification document which is required for most international travel. There is a fee to get a replacement if the original is lost, stolen, or damaged.

Keep these documents in a home safe or bank safe deposit box.

Estate Planning and Administration Documents

  • Last will and testament – States where you want your property to go upon your death. It also names your executor and any guardians for dependents.
  • Healthcare proxy – Also known as a healthcare power of attorney. This document appoints someone to make healthcare decisions on your behalf if you are unable to do so due to incapacity.
  • Living will – Also known as an advance healthcare directive. This is a document in which you provide instructions for care in the event of incapacitation.
  • Durable power of attorney – Legal document which authorizes someone else to handle all or certain specified financial matters on your behalf.
  • Trust agreements – Trusts can be used for many purposes. Common ones are to avoid probate and to obtain more control over distributions to beneficiaries/heirs.

For more information, see Estate Planning Can Be Beneficial Even if You Are Not Wealthy.

Make Sure Estate Planning Documents Will Be Found and Accessible When Needed

These documents will be of no use if no one knows they exist or if they cannot be recovered upon your incapacity or death. The originals of these documents should be stored in a home safe or a bank safe deposit box which will be accessible if you are not around. Copies may also be provided to trusted family members.

You may also wish to give a copy of your will to your executor (often a family member), and possibly your attorney.

Also give copies of your living will and healthcare proxy to your doctor and other healthcare providers as necessary.

The living will, healthcare proxy, and durable power of attorney should be stored somewhere where they can be accessed immediately in case of an emergency. So a home safe may be a preferable option compared to a bank safe deposit box for these specific documents.

You may also scan estate planning documents for online storage, but make sure you store the signed originals as discussed above.

Proof of ownership

  • Stock and bond certificates – Investments these days are typically held electronically in “street name” by your broker as a custodian on your behalf. But if you have original certificates, they should be stored in a safe. Also keep copies of both sides preferably stored online. This may help in replacing the certificates if they are lost.
  • Title to your car – Needed to prove ownership, especially when selling the car or otherwise transferring title. This document should be stored in a safe. There is usually a fee to replace.
  • Deed to your home or other real estate – These documents are recorded at the county clerk’s office and are public record. Certified copies are generally not needed, but can be obtained for a small fee if the original was not returned to you after being recorded, or has been lost.

Insurance Policies

  • Life insurance
  • Disability insurance
  • Homeowners insurance
  • Auto insurance
  • Long Term Care Insurance

Keep insurance policies in a home safe and/or scan and store them online. The insurer generally will have a copy, but it is wise to keep your own copies on hand as well. They can come in handy when you need quick access/reference in case of an emergency. You can also more easily keep track of any changes in coverage or terms by your insurer.

For property and casualty insurance policies, check with your state to determine when liability statutes expire. It is usually two to three years, but the term varies by state. Once the statute expires, you can discard the policy documents.

Other Important Documents

  • Marriage certificate – May be needed to legally change your name, or to apply for joint benefits, insurance, a loan, or to establish joint property ownership.
  • Divorce papers – These documents are generally public record. You can keep them on file for reference in case of disputes.
  • Recommendation letters – These documents are useful when applying for work.
  • High school and college transcripts – Sometimes are requested by prospective employers.
  • Certificates, professional licenses – Provide proof of any credentials or other accomplishments. They may be requested by employers or others. These are often displayed in an office. Otherwise, they can be stored in a safe.
  • Employment, lease, loan, and partnership agreements – Useful for reference, especially in case of a dispute regarding the terms of the agreement.
  • Health Records – Sometimes your records can get scattered if you change doctors or use different specialists, etc. It is a good idea to maintain copies of your medical records in one place so that they can be produced or reviewed as needed.

These are generally documents which you should hold either permanently or until any relevant liability statutes expire. Scanning and electronic storage will generally suffice. However, you may wish to store the originals of documents with a seal or signature in a safe.

Create Lists of Possessions, Accounts, and Passwords

Also keep an inventory of valuable items that you own, and indicate their approximate replacement value, and where they are stored. For example, maintain a list of items kept in a safe deposit box or elsewhere, such as a home safe. Also create a list of all accounts you own. This can include bank accounts, investment accounts, credit card accounts, insurance policies, etc.

These lists should be stored in a safe place which is easily accessible by a trusted person other than yourself. Also include the names and phone numbers of any professionals you do business with such as accountants, attorneys, bankers, investment advisors, insurance agents, etc.

Update these lists periodically as necessary. Be sure to also include on the list any usernames/passwords necessary to log into any online accounts, including your online storage account.

These types of lists can make it easier to locate property and documents for executors, family members, and other professionals should anything happen to you.

They can also help if there is a burglary, or in getting the proper amount of insurance (i.e., contents) coverage. Plus it will make things easier if any insurance claims arise.

You should also take pictures of valuable items and retain their purchase receipts. Photograph the interior of your home as well.

What type of Recordkeeping System Should I Use?

You can really set up your recordkeeping system any number of ways. It is key to use a system that is easy for you to implement and maintain. The system used should also allow you to retrieve documents with relative ease.

One common and logical system is to organize recurring records and documents by year. Create annual folders, whether physical or electronic, for each account. So for a bank account, for example, you can set up a folder for the current year that will ultimately contain twelve monthly statements.

The annual folder may also contain other related documents such as cancelled checks, transaction receipts, or an annual summary. You can do the same thing for brokerage, credit card, and similar accounts. When the year is over, you start a new file with the January statements.

Keep the annual folders for each account for a particular year together in a master folder for that year.

For other, more permanent types of records and documents, you can set up a permanent file. The permanent file may consist of several folders, depending on how many documents you have.

The permanent file should include documents that are not generated on a repetitive periodic basis such as bank statements, for example. It can consist of documents of relatively higher importance, or those that are more difficult or costly to replace.

You can have different folders for items such as birth and marriage certificates, estate planning documents, business agreements, etc.

Conclusion

Good recordkeeping can be useful for tax preparation, financial analysis and budgeting, retirement planning, employment applications, personal identification, estate administration, insurance claims, and other purposes.

To help reduce the risk of identify theft, make sure to use a shredder to dispose of any records or documents which contain sensitive information.

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