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Dollars & Sense: Spring Cleaning For Your Documents

By Roberta L. Nestor

Spring is the perfect time to attack those piles of paper and even your computer files.  There are many reasons to keep your personal papers in order and with identity theft on the rise it has become imperative to make sure you are properly shredding unwanted paper.  With all of the paperless options available to us, the papers still pile up.

Let’s start with the simple items, those you do not need to keep for more than a year.  Basically you only need to keep credit card receipts and bank statements for a year unless they are needed for tax support.  If they are related to your tax returns, then you should keep those for 7 years.  Paycheck stubs and utility bills, credit card statements (that are not tax related) need only be kept for one year.

You should keep your end of year investment statements (for all retirement accounts as well as non-retirement accounts) until you have completely liquidated the investments.  After you have sold them you still should hang on to these annual statements for 7 years from the time they were closed.

If you purchased a home, then you should keep the home closing documents (as well as the closing statement) for as long as you own the property – plus 3 years.  Deeds for home ownership should all be kept as long as you own the property.  If you had service contracts for a new home or builder’s warranty’s, these should also be held until the warranty expires.

Our tax returns are the most important documents and the IRS has specific rules for how long you have to keep your tax returns which are listed below from the IRS website.

  1. Keep records for 3 years if situations (4), (5), and (6) below do not apply to you.
  2. Keep records for 3 years from the date you filed your original return or 2 years after the date you paid the tax, whichever is later, if you file a claim for a credit or refund after you file your return.
  3. Keep records for 7 years if you file a claim for a loss from worthless securities or bad debt.
  4. Keep records for 6 years if you do not report income that you should have reported, and it is more than 25% of the gross income shown on your return.
  5. Keep records indefinitely if you do not file a return.
  6. Keep records indefinitely if you file a fraudulent return.
  7. Keep employment tax records for at least 4 years after the date the tax becomes due or is paid, whichever is later.

Many do not agree with the IRS guidelines and with good reason.  There are several circumstances where you might want to consider keeping your old tax returns indefinitely.  Ask anyone who has been audited or who has had income reporting errors on their social security statements.  The burden of proof is on you, the taxpayer.  Needless to say our tax returns contain 100% of our personal information and should be carefully stored at all times.  Home theft, floods or fire can wipe out those manila folders or envelopes that we keep in our homes.  A safe or safety deposit box is the best way to store these valuable tax returns.

Some of the more common reasons for keeping returns longer than 3 years would apply to individuals who have made non-deductible IRA contributions.  These are reported as a part of your tax-return (Form 8606).  Investment companies do not track whether or not your IRA contribution was deductible or not.  1099’s for future IRA withdrawals may show distributions as being fully taxable even though you have already paid tax on contributions.

Significant home improvements you have made over the years contribute to the cost-basis when selling your home in the future.  If you sell your home and the cost-basis is questioned, the IRS can ask for proof of those home improvements.  Self-employed individuals have to be especially careful keeping records of equipment purchases that are being depreciated, again the IRS can require proof of those purchases, whether they were 7 years prior or 20 years prior.

If your tax returns are basic and do not involve home purchases, investments or retirement accounts you may choose to follow the IRS guidelines.  For most of us, we would rather be safe than sorry and keeping records a few years longer can never work against you.

Roberta L. Nestor is a financial advisor practicing at 491 New Haven Avenue in Milford, CT offering retirement, long term care, investment and tax planning services.  She also offers securities and advisory services as an Investment Adviser Representative of Commonwealth Financial Network – a member FINRA/SIPC and a Registered Investment Adviser.  Fixed insurance products offered through Nestor Financial Network are separate and unrelated to Commonwealth. Commonwealth Financial Network or Nestor Financial Network does not provide legal or tax advice.  You should consult a legal or tax professional regarding your individual situation.  Roberta can be reached at Nestor Financial Network, 203-876-8066 or roberta@nestorfinancial.com.

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