Are you prepared for tax season? It’s time to get your financial records together, whether you’re an employee or if you made some changes this year.
For a growing number of people, they’re taking control of their lives and their finances by starting a new business. You might be among the millions of people who are now apart of the gig economy.
Your taxes will be a bit different this year. You’ll have added tax responsibilities, plus there are things you need to know about financial record keeping.
You want to be prepared in the event that you’re audited by the IRS. Read on the learn about the importance of keeping your financial records.
Why Is Financial Record Keeping Important?
There are a few reasons why good financial record keeping is important. Aside from the potential IRS audits, banks may want to see your financial records in order to close on a loan.
It also makes your life easier when it comes time to file taxes. When you’re more organized and have accurate records, you can file more accurate tax returns.
That ensures that you take advantage of every tax deduction possible.
What Records are Needed?
What records should be part of your financial record keeping file? Believe it or not, it’s not all about financial statements.
You want to keep income and business tax records, bank statements, W-2 forms, and receipts.
You also want to keep any documentation related to your tax deductions. For example, if you took a student loan interest deduction, you’ll want to keep Form 1098-E that’s sent by your loan company.
Financial records also include things like insurance paperwork and warranties. Information regarding retirement accounts applies, too.
You want to make sure that you keep these records in a safe and secure place that few people can access. There’s a lot of sensitive data in these records that can lead to fraud or ID theft.
How Long Should You Keep Records?
This is a very common question. How long you should keep records depends on the type of document. For example, business records should be held for 7 years.
Employee records, such as W-2 forms and payroll tax records should be kept for four years. If you need a copy of pay stubs or W-2 forms for employees, you can make your own.
The IRS offers document guidelines for specific situations, too. You need to keep records indefinitely if you were the victim of tax fraud or if you didn’t file a return.
In cases where you didn’t report income that was more than 25% of the income on your return, then you need to keep records for 6 years.
The documents that you used to file personal income taxes should be held for seven years.
Smart Financial Record Keeping Makes Life Easier
One of the building blocks of financial freedom is organization. Good financial record keeping allows you to take control of your finances. It also makes your life a lot easier when you do your taxes or if you get audited by the IRS.
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