Money Matters – Spring Cleaning: What Should You Keep, How Long, And Where
BOSTON (CBS) – Most of us keep too much of the paper that comes into our homes. Common sense should prevail about what to keep and how long. A warranty for a clock radio that is 10 years old is really just a keepsake and can be tossed.
A word of advice: When tossing old documents if they have pertinent information like your name, credit card number or Social Security number on them use a shredder or a pair scissors.
So what should you keep? The following is an excerpt from my most recent book, Money
Taxes: Maintain a separate file for each calendar year for your personal tax data: records of income, transactions such as property sales, itemized deductions, etc. IRAs or pension contributions should be noted in this file as well as having a folder of their own. Keep copies of Form 1099s, as well as any documentation of your deductions, such as canceled checks. Keep tax returns for at least 7 years. The IRS in most instances has three years from the time you filed to audit your return, if the IRS believes you have under reported your income they have another 3 years to come after you and if they suspect fraud there is no time limit.
Banking: When reconciling bank statements (and you should be doing this monthly), file any copies of checks needed for tax documentation with the current year’s files. Keep all copies of checks that relate to the house, e.g., new roof. You’ll need these when you sell your home, to help establish its cost basis. File these in your real estate file. Retain check ledger and bank statements for at least seven years, just in case the IRS audits you.
Stocks, Bonds, and Mutual Funds: It’s best to maintain a file for each account and a folder for each holding. Keep all cost information relating to investments, so you can determine your cost basis when you sell them, to determine whether you had a profit or a loss. Keep copies of all 1099s—the form sent to you by the fund indicating capital gains and dividends paid during the year. You may need those old 1099s to determine the cost basis for your mutual funds. Most companies are now doing that for you, but if you have something you bought a very long time ago they probably do not have the cost basis on file. Also keep the annual statement the company sends.
Insurance Policies: You want separate folders for each type of insurance you have. Keep the most recent policy in your current file, along with any endorsements or addendum. Records of pending and paid health insurance claims should be kept in a separate file labeled “medical insurance payments.” It can take months to get some claims paid.
Credit Cards: Retain the loan agreements and any new information the card issuer may send out with your monthly statement. Retain billing statements for at least one year, longer if there is information related to your tax file. Staple all pertinent charge slips to the warranties so if you have to return an item you can find the paperwork. Maintain a list of all card numbers and the phone numbers to call in the event a card is lost or, worse, stolen.
Real Estate Documents: Closing papers, settlement sheets, deeds, and titles should be maintained in a separate file for each property. Keep copies only. The originals should be in a safety deposit box or fireproof safe. Keep in this file any documents, such as canceled checks or receipts, for work that increases the cost basis of your real estate.
Ownership Papers: Purchase records, receipts, and other items pertaining to ownership of cars, boats, or other large equipment or appliances should be maintained in separate files, with the warranties and instruction books. If something goes wrong, you know where to look.
Employment Records: Keep information relating to employee benefits, employee contracts, and copies of W-2s. Keep the W-2s until you begin to collect your Social Security benefit.
Warranties/Service Contracts/Instruction Booklets: File warranties and service contracts along with the receipts, in case you have to return an item or have it serviced. Maintain a file for instruction booklets, which you should update as you purchase new items.
Personal Data: Originals of personal records such as birth certificates, marriage certificates, adoption papers, military service documents, and divorce decrees should be stored in a safety deposit box or a fireproof safe. Original wills and trusts are best kept in another safe place, such as your lawyer’s safe. This is because safety deposit boxes are often sealed upon death. Keep copies of wills, trusts, original durable powers of attorney, and medical directives in a safe but accessible place in your home.
Monthly Bills: Monthly phone, electricity, and cable can be filed in a house or maintenance file or individually. Keep for one year and then discard. You can keep lists of your annual expenses for comparison purposes such as your electric and gas.
Pensions and IRAs: Set up a permanent file for each retirement plan. File all annual statements showing contributions, distributions, and any rollovers. If you file IRS Form 8606, which is for a non-deductible IRA, keep copies in this file as well.
Miscellaneous: Now that so many people own video cameras, videotape your home and its contents, to create a permanent record of all of your valuables. This will be helpful in the case of a robbery or a fire. Store the video in a safety deposit box or a fireproof safe. If you don’t have a video of your home and its contents, keep a list of your belongings in a safe place and take pictures of your possessions. We know how tedious it can be to draw up a list but, as you’ve probably now discovered, you own a lot of stuff and you need to take steps to protect it.
Organizing your stuff will give you a sense of accomplishment. But what’s more important is that it will be a gift to your family. I would also recommend that, as you get on in age, you hold annual family meetings to let everyone know where your stuff is located. No, not where the car keys are, but where you keep your files.
Tell them if you’ve changed or added advisors in the last year and give them updated lists. After completing the Inventory & Location of Important Documents worksheet, make a copy for your files and then give a copy to your attorney, a family member or a trusted friend for safekeeping.
One more thing: From the IRS:
The length of time a document must be retained depends on the action, expense, or event the document records. Generally, records that support an item of income or deductions on a tax return must be retained until the period of limitations for that return runs out.
PERIOD OF LIMITATIONS DEFINED:
The period of limitations is the period of time in which a tax return can be amended to claim a credit or refund, or that the IRS can assess additional tax.
We’ve listed below the periods of limitations that apply to income tax returns. (Unless otherwise stated, the years refer to the period after the return was filed. Returns filed before the due date are treated as filed on the due date.)
KEEP RETURNS FOR 3 YEARS IF:
If you file a claim for credit or refund* after you file your return; keep records for 3 years from the date you filed your original return or 2 years from the date you paid the tax, whichever is later.
KEEP RETURNS FOR 4 YEARS IF:
It is an employment tax record. Keep all such records for at least 4 years after the date that the tax becomes due or is paid, whichever is later.
KEEP RETURNS FOR 6 YEARS IF:
You do not report income that you should report, and it is more than 25% of the gross income shown on your return.
KEEP RECORDS FOR 7 YEARS IF:
You file a claim for a loss from worthless securities or bad debt deduction;
KEEP RECORDS INDEFINITELY IF:
You have filed a fraudulent return, or
You do not file a return;
PAY SPECIAL ATTENTION TO RECORDS CONNECTED WITH PROPERTY:
Records relating to property must be retained until the period of limitations expires for the year in which you dispose of the property in a taxable disposition.
Those records are needed to figure any depreciation, amortization, or depletion deduction and to figure the gain or loss when you sell or otherwise dispose of the property.
Generally, if property is received in a nontaxable exchange, your basis in that property is the same as the bases of the property you gave up, increased by any money you paid. Records must be retained on the old property, as well as on the new property, until the period of limitations expires for the year in which you dispose of the new property in a taxable disposition.