The Records You'll Need
Good record-keeping is the key to accurate tax planning and preparation. Don't overwhelm yourself with systems and don't spend a lot of money on organization. A simple system that isn't bogged down by unneeded records is all you need.
How Long to Keep Your Records
Tax returns should be kept indefinitely — who knows when you'll need them. Of course, that doesn't mean that you need to keep all the supporting documents for more than three years. The IRS won't audit a return that is older than three years, unless they suspect fraud. But there is still a lot of information on your return that will come in handy down the road: Your annual income can prove your social security benefit due; your reinvested dividends support your investment basis; and you'll need a record of your IRA contributions when you calculate your taxes in retirement. Here's a tip: use Adobe Acrobat software to make digital copies of your tax returns that take up no space!
Keep investment statements that show your initial purchase until you sell the investment. If you buy through a brokerage firm, it may keep track of this information for you on your monthly statement as Cost Basis. If that's the case, you'll only need to keep a running cycle of the previous twelve monthly statements.
Systems to Manage
Add a file to your regular filing system — whether paper or electronic — for last year's tax return and this year's tax information. Drop tax-related documents into the file as you come across them: charitable gifts, real estate tax receipts, medical bills, tuition bills, your year-end pay stub, etc. Refer to last year's return to see what to watch for. For example, if last year's return has an interest payment from XYZ Bank, you should be looking for a 1099 for XYZ Bank again this January. Looking for documentation as the year progresses will keep you from scrambling at the last minute to find things.
Using a Personal Bookkeeper
If you're too busy or disorganized to gather documents or manage bill-paying, consider hiring a personal bookkeeper. Use e-mailed bills and an online bookkeeping service such as Quickbooks so you both can access your records without needing to meet face to face. Bookkeepers don't need to sign checks for you — in fact, it's safer if they don't have direct access to your funds. Have the bookkeeper print checks for your signature or have them tell you where to download them online and print them yourself.
Having a personal bookkeeper doesn't mean you don't have to review your checkbook and other records. It just saves you the time needed to gather and organize the information. Plan a monthly phone meeting with your bookkeeper to review accounts and income and expenses.
Check Appendix B for information on where to find a personal bookkeeper. Paying the bookkeeper will be an extra cost, but if she helps you find time for the things you'd rather do or if she makes tax time easier or saves your CPA time, she could pay for herself.
