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I have a file cabinet at home with bank statements dating back to when I opened my first checking account when I was sixteen years old.  Nine years later, I wondered if I still need those bank statements.  I also have every tax return I have filed, ever.  Do I need those?  I did some digging, and I found a great resource.  Here is the synopsis:

Tax Returns – You need to keep all documentation around your taxes for at minimum seven years.  The statute of limitations for the Internal Revenue Service (IRS) to come after you for back taxes is three years, so that is where the minimum comes from.  However, if you have failed to report income, the statute of limitations is six years.  To cover yourself, it is best to have a seven year record of taxes.  Just to be safe, it is probably a good idea to keep your form 1040 and record of payment to the government for life, but you do not need the backup documents for more than seven years.

Bank Statements – Did you give a charitable contribution or make a business expense payment on your credit card or bank account statement?  If you ever have to show proof of a deduction to the IRS, you need that statement.  Like tax returns, keep them for about seven years.

Brokerage – The best advice I can find here is to keep your year end statements and trade confirmations indefinitely, but you don’t need to keep your monthly statements more than two or three months in case you find any errors.  When you sell a security, you have to be able to prove the original cost for capital gains taxes.  That is why you need your year end statements so long.

Retirement – To make sure you are safe if you ever have to withdraw principle (not interest earned) from a Roth or other retirement account, you have to able to prove what you put in and when you put it there.  That means you need to keep retirement statements until you are at a point when you can withdraw tax free.  For many of us, that means 40 years or so of records.

Utility Bills – If you have a long record of cell phone, power, or other utility bills lying around, you can free up that space today.  You don’t need more than two or three months of history that can demonstrate that your payment was send and received.  Once your account is correct, toss it in the shredder.

Insurance – If you have any records of claims and policy details, keep them as long as you have the policy.  If you do not have proof and you ever have to challenge your insurance company, you need to have records or it never happened.  For health insurance, make sure you have evidence of coverageso you are never hit by a pre-existing condition clause (while that is still legal).

Paper or Electronic Records?

I have a hybrid system.  For my bank accounts, I have paper records because I never took the initiative to change to paperless and scan in my old files.  For accounts that I have opened in the last five years, I have just started with electronic statements and keep them saved on my computer hard drive and an external hard drive.  I also plan to buy an encrypted USB to have a third backup for only financial documents.

It is important to make sure electronic copies are safe from hackers and hard drive crashes.  I would suggest that you do not keep financial data in online storage, because there is a chance that it could be hacked.

I am planning to scan in all of my old paper files and shred them someday, but that takes a lot of effort and I am much to lazy to break the status quo.

So, what do you use for record keeping?  What are you policies and strategies?  Please share with all of us in the comments!

Just a note: This is my own personal advice based on what I found through my own research.  I am not liable if you throw something away that you need and the IRS shows up at your door.

In my home state, the government is looking at different ways to fix immense budget issues.  Included in the proposals are a proposal to tax candy and pop (a.k.a. soda or soft drinks).

NACS Online had this to say:

I just got the last of my tax forms together for 2009, and I have filled out all of the paperwork for my accountant to begin doing my taxes. 

Last year, I did my taxes and had my accountant do them as well.  He made my refund larger by more than his fee.  He is also there for me if I am ever audited at no additional charge.

However, for many people, taxes are not very complex.  It might be just as easy and cheaper to do it yourself, either by hand or using a computer program or tax website.

So, which do you do?  Do you take your taxes to an accountant or take the do-it-yourself route?  Please tell us what you do and why in the comments.

Are there any closet freelancers in Narrow Bridge reader land?  If so, I have a question for you.  I got a form from my accountant last week asking about any direct costs I have associated with freelance writing I do online.  I made about $650 last year from writing projects.

The question is, how do I figure out what percent of Internet costs were associated with the writing?  How about other utilities and rent?  I did the work from home, and could not have done it anywhere else.  I needed power, Internet, and space to do the writing.  What part of all of that is a business expense?

Have any of you done this before?  How did you figure it out?  Please give your ideas in the comments.

[Also, a quick thanks goes out to Evan for including Narrow Bridge in this week's Carnival of Personal Finance.]

As we reach the end of the year, it is time for that lovely American tradition: tax season.  Starting January 1st, keep your eyes on the mailbox (and e-mail box nowadays) for tax forms from employers, banks, investment companies, and other income sources.

To get ready, I always make a full list of what I expect to get and check things off as I go along.  Here is a re-visit of a post from last year about preparing for tax time.

Only three months to tax day. It is probably time to start getting ready. Here are my two cents on early tax preparations. The first steps involve making lists and gathering documents needed for tax preparation.

1. Make a list of all of your bank accounts (even ones that you do not use). As your forms start to come in the mail (or are available online), check them off of the list. Most bank tax forms start to come around the end of January. These come in the form of IRS tax form 1099.

2. Make a list of all investment accounts. Like banks, you will get forms starting at the end of January. Unlike banks, most investments do not require that you pay taxes until the investment is sold. Your investment firm will take care of tracking that for you and send you the detail.  These come in different versions of the 1099 and several other forms.

3. Make a list of jobs or income sources that will report income to the IRS. I had two jobs this year, but expect three W-2 forms from an extra income source.

4. If you have a mortgage, add that to the list. Form 1098 shows interest paid for a mortgage, which is tax deductible.

5. Collect any other deduction forms. These can relate to education (direct school expenses and student loan interest) or donations. I keep my school book receipts and get a tax form from my school for tuition. I also make donations (not too big, as I am paying for school) to 501c3 charities that allow for a tax deduction.

This is not an exhaustive list, as everyone has unique circumstances. I fill out a form for my accountant listing everything above and give him the big stack of tax forms. I found that a professional preparer is worth the cost in my case because my combination of income, expenses, scholarships, and deductions fall under so many different tax laws that only a professional could ensure I get every deduction and credit that I deserve.

Did I miss any tax forms that you need? Let me know in the comments.

If you live in the US and have a federal tax question, this is your lucky week.  TurboTax is offering a free question answered by a tax professional as part of an annual promotion.  This week, you can type a specific question into TurboTax’s website and receive a phone call back within 24 hours.

I just entered my question, which involves deducting tuition rather than taking the lifetime learning credit.

From Lifehacker:

Tax season—it’s coming up sooner than you think. If you’ve got any questions on your personal, federal income taxes, the folks behind TurboTax will once again call you back with a free answer between now and Jan. 31.

Just as with last year, actual humans affiliated with Intuit’s TurboTaxsoftware and web applications will answer questions left on their FreeTaxQuestion.com site, calling back within 24 hours. There’s a limit of one question per person during the promotion, running through Jan. 31, and it only applies to federal taxes, not state-specifically Forms 1040 (personal) and 1065, 1120, or 1120S (business). You can leave your question from 8 a.m. to 5 p.m. Pacific time.

You will, of course, likely get a soft push toward TurboTax services, and questions beyond specific, technical issues should probably go to an accountant. That said, it’s still a nice little freebie for a little piece of mind, and a good number of commenters were pleasantly surprised with their results last year.

This is a great offer that you can take advantage of for free.  That is my favorite four letter f-word.  Just follow the link below to ask a tax expert a question.

Ask a Tax Expert Promotion [TurboTax]

Almost every investment firm offers a 529 account.  They talk about how great it is and how everyone should have one.  Most people have no idea how a 529 works or what it is.  This post will give you a breakdown on the basics of a 529 and what you need to know if you are going to get started with this type of account.

What It Is

Explained simply, a 529 is an education savings account.  529 plans allow you to save for future education expenses.  The funds can be for your future education, your kid’s future education, or any other family member.  Generally people use them to save for graduate school or their child’s future college expenses.  529 funds can be withdrawn to pay for “qualified expenses” such as tuition and fees.

Why You Want One

You might be thinking that you can stash away cash in any old savings account or investment account and do the same thing.  Not exactly.  A 529 account is special because of its tax status.  You can make contributions to a 529 account “pre-tax” from you income.  Like a 401(k), 403(b), or traditional IRA, you can deduct 529 investments from you income before you are taxed on it.

How It Works

 A 529 works just like a 401(k) for the most part.  Many employers offer to make deposits in a 529 account automatically.  This is the best way to fund a 529.  If you can just set it up and forget about it, you will never have to worry about writing a check or transferring the funds every month.

Also like a 401(k), you can pick how it is invested.  You can leave your 529 funds in a savings account or CD, or you can invest it into mutual funds or stock.  If you open your 529 through a brokerage firm, you have total flexibility to invest as you please.  Companies like Charles Schwab or Oppenheimer often give suggestions of how to invest 529 funds to have the cash ready when you need it.  This is probably the best route if you are saving for your own education.  Just remember, like any investment, there are risks.  The firm can help you figure out what is best for you.

While investment firms all offer a 529, you might be better off to check with your state government.  Many states operate a 529 fund where you can safely keep your child’s future.  I know my state, Colorado, has a plan that many parents start investing in when their children are born.  Some state funds perform very well while some have suffered from stock market losses.  Check into your state for details.

Where To Start

Start with your employer.  Look into making an investment straight out of your paycheck.  If you can, you can most likely manage your funds easily and invest into an assortment of funds.  You will have to do a little paperwork when you set it up, but it is easy from that point on.

If you can’t invest in a 529 through your employer, look into a state government or private option.  Compare fees and how easy it will be to make contributions.  Also look into what you will need to do when you are ready to make a withdrawal.  For some plans, it is as easy as writing a check.  Others are more complicated.

Finally, before you make your first investment, take a little time to read the IRS website for 529 details.  It is important to know what you can use 529 funds for and what the penalties might be for withdrawing early.  Be well versed in how the 529 codes work when you get started.  If you have a tax adviser, consult with him/her as well.

It really is that simple.  Use the automatic investing plan to make things easy, even if you can’t with your employer.  You can use bill pay or automatic transfers in an online bank account to fund your 529.  Keep track of the paperwork for tax season.  You can save a lot on taxes if you use this investment method correctly.  It is also nice to have the peace of mind that your education, or your child’s education, is going to be funded without worry.

If you are like me, you have a big stack of US savings bonds that has been accumulating dust in a safe deposit box since you were born.  If you are under 30, those are still gaining interest today.  But what should we do with our savings bonds?  I never thought to cash mine in until I got to grad school, and that prompted quite a bit of research into how to deal with finding the value, paying the taxes, and cashing in my bonds.  I will take you through the process I went through up to today, the day I take my bonds to the bank.

The first thing to do if you have savings bonds, if you want to cash them or not, is to find the value.  The best place to go for that is treasurydirect.gov.  Treasury Direct is the US Treasury website for bonds and similar instruments.  The bond calculator requires you to enter the issue date and face value of the bond to find the current value.  You can enter all of your bonds into the calculator to find the current value of all bonds and interest earned.

If you decide you want to cash the bonds, you should look into tax deduction options.  Using your bonds for qualified higher education expenses (such as tuition and fees) or if you modified adjusted gross income is below $82,100 (or double that if filing jointly with another individual.  Everyone’s situation is a little different, so consult with a tax professional for personalized information.

If you do not cash the bonds, you can convert them to “electronic savings bonds”.  Treasury Direct has a simple process for doing this.  A word of caution, if your bonds are matured and you convert them to electronic bonds, they will be cashed out automatically.  If you want to keep a matured bond, you have to keep it in paper.  To convert the bond, you have to sign up for an account at Treasury Direct and set up a conversion account.  You list each bond individually that you plan to convert, and you mail the bonds to the US Treasury.  The bonds will then show on your Treasury Direct account.  From there, you have the option to cash the bonds in and transfer the funds to your bank account as an ACH or leave them to accumulate interest.  Another perk of Treasury Direct is the ability to purchase and manage all of your savings bonds in one place.

I took the other route to cash my bonds, I went to the bank.  Any bank or credit union in the United States should be able to cash in your bonds.  I took 18 in this morning to convert and spent an hour dealing with the paperwork and whatnot.  If you bring the bonds to the bank, be sure to bring a valid drivers license or other government issued ID with you for verification.  The process is fairly simple, but it does take a while for the bank teller to fill everything out.

You can cash your savings bonds 5 years from the issue date without any penalty.  They will generally reach the face value in 10-15 years, but you can hold on to them to continue accuring interest for up to 30 years for all series E, EE, or I bonds (the most common for individuals).  You must pay taxes on interest earned during the entire period unless you fall into the categories outlined above.

One last issue I want to touch on: savings bonds are not just for kids.  While savings bonds are popular presents for newborns and Bar Mitzvahs, you can buy them for yourself at any time in your life.  Many employers, and Treasury Direct, offer automatic savings bond purchase plans.

While working in banking, I had a customer come in every two weeks with a $500 savings bond that she and her husband had bought 30 years earlier.  Though she was long retired, she had a steady $1000 per month come in from an investment she made during her working years.  This is a great option for no risk investments.  The only downside is that with low risk comes low interest.  Current bond rates are only 1.3% and are fixed for the lifetime of the bond.  New rates are set every 6 months.  If you get a good rate, however, you get it for the life of the bond as well.  The bonds I just cashed earned about 4% for the last 24 years.

I hope this post tells you everything you ever wanted to know about US Government Savings Bonds.  If not, please let me know in the comments.  I promise that I will find an answer to your questions and post them back here.

If you do not already have your taxes done, get to work. Tax day is April 15th. That is Wednesday! You have two days to e-file or postmark your taxes. If you do not think that is possible, do not simply ignore the deadline. You can still file for an extension penalty free, but you have to act fast.

Feel free to post your tax tips in the comments for the last minute filers reading the blog.

I just got my taxes back from the accountant at the beginning of the week. I found a fun surprise. My income went up, my taxes went down. My income was up about $10,000 in 2008 compared to 2007. The biggest factor is that I worked more in 2008. Generally, one would think that an increase in gross income would lead to an increase in taxes. Not this year.

By knowing how tax codes work and taking advantage of deduction and credit opportunities, I will be getting a nice refund. I discussed this a few weeks ago when my forms all came in. Now I know the final result.

I will be getting a roughly $2400 refund on my Federal taxes. $2000 of this is a result of the lifetime learning credit. Anyone taking college classes should take advantage of this. If you are a student in the first two years of college you should probably take the “Hope Credit” instead.

I will be getting about $140 back from the state due to different deductions.

In all my taxes a quite a bit lower than last year. It only takes a $90,000 masters degree to save $2,000 on my taxes!