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Spring Cleaning: Financial Records

By: Financial Hotline
Spring 2024 (Vol. 42, No. 1)

Organizing your financial records will help you save time and maximize your productivity. A good place to start is weeding out unnecessary paperwork. Let’s get started:

Federal tax records...

Generally, the IRS has three years to audit a tax return, from the later of the due date of the return or the date you file. You can also file an amended return within this time frame if you overlooked something.

However, despite the three-year guideline, many tax advisors recommend retaining copies of your finished tax returns indefinitely to prove that you filed. Even if you don’t keep returns indefinitely, at least keep them for six years after the returns are due or filed, whichever is later.

It’s a good idea to keep the records that support items on your individual tax returns until the three-year statute of limitations runs out. Examples of supporting records include canceled checks, charitable contributions receipts, and documents showing your mortgage interest payments and retirement plan contributions. These documents may also support an amended tax return if you find you overlooked something.

So which records can you throw away today? Generally, based on the three-year rule, you’ll soon be able to throw out most records associated with your 2020 return if you filed by the due date (which was extended to May 17, 2021, due to the pandemic). Extended 2020 returns could still be vulnerable to audit until October 15, 2024.

Also, some tax issues are still subject to scrutiny after the three years. If the IRS suspects that income has been understated by 25% or more, the statute of limitations for audit rises to six years. If no return was filed or if fraud is suspected, there’s no limit of time for the IRS to launch an inquiry.

Certain records that support figures that may affect multiple years, such as carryovers of charitable deductions, should be saved until the deductions no longer have effect. Also, don’t toss out records that support deductions for bad debts or worthless securities that could result in refund claims. You have up to seven years to claim them.

State tax records...

The previous guidelines are geared toward complying with federal tax obligations. However, there may be variations. Plus, states generally have the right to resolve their own issues related to federal tax returns that have been audited. So, hold on to records related to an IRS audit for a year after it’s completed.

Real estate records...

Retain real estate records for as long as you own a property, plus three years after you dispose of it and report the transaction on your tax return. Throughout ownership, keep records of the purchase, h me improvements, relevant insurance claims and refinancing documents. These documents help prove your adjusted basis in the home, which is needed to figure any taxable gain at the time of sale. They can also support rental property or home office deductions.

Investment account statements...

To accurately report taxable events involving stocks and bonds, you must maintain detailed records of purchases and sales. Records should include dates, quantities, prices, dividend reinvestment and related expenses. Keep these records for as long as you own the investments plus additional time until the statute of limitations for the relevant tax returns expires.

The IRS requires you to keep copies of Forms 8606, 5498 and 1099-R until all the money is withdrawn from your IRAs. It’s even more important to retain records of all transactions relating to Roth IRAs, in case you’re ever questioned.

Pay Stubs, Medical Bills, Bank and Credit Card Statements...

These records can usually be thrown away after one year, unless they are your only proof of income and the payer does not issue a 1099 or W-2.

You can also usually toss paid medical bills unless you have an unresolved insurance dispute, in which case you would retain the medical bills until the dispute is resolved. It’s possible you can also access all these records online and save them to files on your computer.

Purchase Receipts...

You can throw out most monthly bills after you see the payments have been credited and there are no disputes. Don’t toss receipts that pertain to products or services under warranty, your tax returns, insurance claims or a purchase you are disputing.

Originals and or copies to save indefinitely...

Do not throw away:

  • Birth certificates
  • Death certificates
  • Social Security cards
  • Marriage certificates
  • Divorce certificates
  • Adoption papers
  • Passports
  • Wills and living wills
  • Powers of attorney
  • Legal filings
  • Military records
  • Retirement and pension plans
  • Inheritance documents
  • Beneficiary forms
  • Insurance policies
  • Deeds to real property owned

Keep for as long as you own...

Deeds, surveys and closing documents to real estate owned. Titles to boats and vehicles. Documentation for any item you have insured or that is under warranty or guarantee.

Health insurance policies...

Keep all your health, disability and other insurance information for as long as you have coverage and then add an additional year in case a claim comes up that wasn’t addressed before.

Homeowners insurance...

Keep that expired policy at least three years; you may need it. For example, it may take years for storm damage to cause a leak in your roof but the policy in effect at the time of the storm is the one you will have to prove to make the claim.

Purge with Caution...

If you think you may need it – keep it. For essential original documents you may want to invest in a small document lockbox that is fireproof and waterproof. But remember you don’t have to make space for boxes of paperwork. You can cut down on clutter by storing your important documents electronically.

Electronic options include using a scanner to scan to your computer or taking photos with your cell phone. You can also choose use cloud based storage such as iCloud or Dropbox, or external hard drives like HDDs, SDDs or a flash drive. It’s always a good idea to back up digital copies just in case.

Be cautious when disposing of paperwork that includes personal information that can be used to steal your identity. It is a good idea to shred the paperwork.