SAVE YOURSELF TROUBLE BY KEEPING GOOD RECORDS 

I get questions all the time about keeping records; especially at this time of the year.  Paperwork can pile up quickly in our homes, and people want to know what they should keep and what they can throw away.  They also want to know how long they should keep certain documents.  And some just want to know why it’s important to keep records at all.

The main reason you need records is to help prepare your tax return – and in case the IRS ever audits you.  Insurance is another reason for keeping records, and you often need documents when applying for a loan.

Where you keep paperwork is just as important as what you keep.  Organize documents into folders such as “Income”,  “Expenses”, “Home”, and “Improvements”.  Break these categories down further if you have several financial accounts, banks, or investments, or if it will help you find them easier. 

Let’s start with records you need to keep forever, such as tax returns.  They help you prepare future returns, and you will need them if you have to file an amended return.  These records also will help with your will and estate planning.

Keep all contracts and real estate records forever.  These include closing documents, purchase and sales invoices, proof of payment and insurance records.  You should keep your mortgage payment stubs and statements until you pay off your house.  If you’ve made home improvements, keep those records as long as you own the house, plus seven years.  Making capital improvements to your home modifies its cost basis, which is important in determining if you won taxes when you sell.  The current tax law regarding house sales states: If you occupy the house two of the last five years, you can exclude from tax any profit on the sale up to $500,000 for a couple or $250,000 for a single person.  This current law has been in effect for a few years now, but there is no guarantee that the law excluding this amount will be here forever, so keep those house documents as proof of major repairs or upgrades.

As for other loans, keep all statements until the loan is paid off.  That includes student loans, car loans, and any other financial transaction in which you are the lien holder.

The IRS recommends that you keep Copy C of your W-2 forms until you begin receiving Social Security benefits.  You will want the W-2’s if there is a question about your earnings in a particular year.

Records that you should keep for at least seven years include canceled checks from your bank, bank deposit slips and bank statements.  The documents you used to prepare your tax returns should be kept for six years.  And always keep the last pay stub you receive when you leave or take a new job.  Even though the IRS says to keep your returns for six years, I suggest that you keep them forever.  I have had two instances where the State of Georgia sent a letter to a taxpayer who lived in Georgia all his life, stating that he had never filed a Georgia return.  He was able to provide 25 years of filing therefore ending the investigation.

            Opinions also differ on what investment records should be kept and for how long.  In general, keep records of any investments you own for the period of ownership plus seven years.  These include brokerage statements, 1099 forms (which you should keep for your tax records anyway), mutual fund statements and any other paperwork on your investments.

            Keeping track of the tax cost of your investments is also important.  If you switch brokerage firms, the new firm may not keep track of the cost of your transferred assets, which can affect capital gains when you sell them.

            You also want to keep records regarding non-cash contributions to charities.  A method that I suggest is: While you are cleaning out your closets and passing on those items of clothing that have shrunk since last season, make a list detailing each item and indicate the approximate purchase price.  When you complete your list, add the cost of all the items and take 20% off the total.  This will give you the approximate “thrift store” value of the items and therefore the amount you can deduct on your tax return, assuming that you itemize your deductions.

            It seems like a long list, I know, but the good news is that you get to throw away many documents, too once they’ve outgrown their use.

            For starters, you can shred credit card statements after three years.  You can also shred old utility bills (unless you have an office in your home).  Any other recently paid bills statements should also be shredded once you have confirmation that they have been paid.  We recommend shredding instead of trashing your documents to protect your personal information and protect against identity theft.  Electronic bill pay through your bank or other financial institution is great just for that purpose.  With Web bill pay, you have an electronic record of every bill you’ve paid and when it was processed, so you always have proof if there is a dispute with a company or a bank over an unpaid bill.

Should you have any questions regarding these or other record retention, please give me a call at 770-446-3863 or e-mail me at: jimmy@clackcpa.com.