Many Americans find the tax season stressful, but this year’s filing process could be worse than ever.
As a result of the pandemic, the IRS faces a huge processing backlog, according to a January 2022 National Taxpayer Advocate report, while a shortage of staff means that many taxpayer queries remain unanswered.A more recent report found that the backlog had ballooned to nearly 24 million returns for the 2021 tax year.
“Given the difficulties of dealing with the IRS, this is not a good time to throw away any tax-related paperwork,” says Dan Herron, a CPA and financial planner in San Luis Obispo, Calif.
So it’s crucial that you keep track of tax forms and other documents that come in. Many Americans, for example, should keep an eye out for a new IRS form, Letter 6419, which details how much you received in expanded Child Tax Credit payments in 2021.
You should also be sure that your tax documents are well-organized. Greg McBride, chief financial analyst at Bankrate, suggests that you put all your W-2 forms together in one place, and do the same for your 1099 forms and brokerage account statements.
“If you haven’t yet started on your taxes, getting your paperwork in order will reduce stress and make you more efficient,” McBride says.
Even if you’ve already filed your taxes, creating an organizational system now could benefit you if you’re audited. It will also make life easier when you have to do taxes again next year.
It's Not Just About Taxes
While you’re focused on your tax papers, it’s good idea to organize all your financial documents, says Barbara Weltman, an attorney who runsBig Ideas for Small Businessand is the author of “J.K. Lasser’s 1001 Deductions & Tax Breaks 2022” (Wiley, 2021).
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“There are many occasions when you may need to retrieve your papers at short notice,” she says.
For instance, you may need taxes and brokerage financial statements from previous years if you’re meeting with a financial adviser. If your home is hit by a fire or flood, or a thief pays a visit, you may need quick access to your insurance papers. If you become ill, your loved ones may need to find papers that prove they can look after you, such as your healthcare proxy or durable power of attorney.
“While the process may be daunting, getting your papers organized now means you can purge unneeded documents and simplify your life,” McBride says.
How to Organize Your Records
Weltman says a good way to start is to divide your financial papers into four categories.
Keep for less than a year.In this file, Weltman says to store your ATM, bank-deposit, andcredit cardreceipts until you reconcile them with your monthly statements. Once you’ve done that, shred the paper documents or securely trash electronic files unless you need them to support your tax return. Keep insurance policies and investment statements until new ones arrive.
Keep for a year or longer.Hold on to loan documents until the loan is paid off. That will often be for more than a year. If you own acar, hold on to the title until you sell it. If you have investments in stocks, bonds, and mutual funds, for example, keep the purchase confirmations until you sell so that you can establish your cost basis and holding period, McBride says.
Keep for seven years.If you fail to report all of your gross income on your tax returns, the government has six years to collect the tax or start legal proceedings. To be on the safe side, McBride says to keep all tax records for at least seven years.
Keep forever.Records such as birth and death certificates, marriage licenses, divorce decrees,Social Securitycards, and military discharge papers should be kept indefinitely. Also, hold on to any defined-benefit plan documents, estate-planning documents, life insurance policies, and an inventory of what’s inside your bank safe deposit box.
How to Store Your Files
There are many ways to store important documents. Weltman says it’s a good idea to use a fireproof safe or password-protected electronic file for documents such as bank and investment statements, estate-planning documents, pension information, pay stubs, and tax documents.
She also says you may want to invest in a safe deposit box for papers that can’t be easily replaced. These include original birth and death certificates, Social Security cards, passports, life insurance documents, and marriage and divorce decrees.
As an extra layer of security, scan your documents, making sure they are clear copies, says Herron. You should also back them up to the cloud. To protect your data, make sure the storage provider uses encryption technology. You can also store copies of your files in folders on an external hard drive that is password-protected.
Penelope Wang
I cover everything from retirement planning to taxes to college saving. My goal is to help people improve their finances, so they have less stress and more freedom. What I enjoy: walks through the city, time with family, and reading mysteries, though I rarely guess who did it.
