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Advice & More May 2016

Dollar Sense

Buried in Old Paperwork? Got the Urge to Purge but Afraid to Get Rid of Documents?

By Teresa Ambord

Individual Retirement Account (IRA) statements. The IRS requires that you keep this documentation while you have money in the accounts. Even after you close the accounts, keep for the statute of limitations on the relevant tax returns.

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Real estate records. Keep all records related to property you own –like costs to improve, insurance claims, refinancing documents, etc. – until at least three years after you sell the property and have reported the sale or disposition on your tax return.

Tax time just happens to coincide with spring, when most of us have the urge to clean and get rid of excess stuff. But now that tax deadline has passed once again, if you’re like many of us, there’s some fear of throwing out the wrong documents, receipts and other records. There’s even an old joke that says items are completely useless until you get rid of them. Then and only then do they become invaluable.

That fear is what keeps many people hoarding boxes of paperwork that are useless, take up space, and even create a fire hazard, depending on how they’re stored. (My mom still has utility bills from a house she sold 46 years ago. How does that happen? It started with worry that she’d need something. Now the idea of going through those papers has grown into a task so daunting, it’s easier to ignore.

 

What You Should Keep and for How Long

Tax Items. The IRS says you should keep your filed returns and all the documentation to support them (receipts, statements, W-2s, 1099s, etc.) until the statute of limitations is up. When is that? It’s generally three years from the time you file your return or the due date of your return, whichever is later. So let’s say you filed your 2012 tax return on March 1, 2013. The statute of limitations is up on April 15, 2016. So this year, you could technically burn or shred your 2012 return and supporting documents.

Why three years? Because the IRS can audit your return going back a minimum of three years. That’s also the amount of time you have to file an amended return if you missed something.

However… many experts say you should keep your returns for a minimum of seven years. Why?

  • If the IRS suspects that you substantially understated your income (by 25% or more) they have six years to audit your return.
  • And if they suspect fraud, or if you failed to file at all, there is no limit.
  • The IRS says to keep documentation that affects more than one year on your tax return until it no longer affects your taxes, plus seven years. That would include such things as loss carry backs or carry forwards.

Bottom line, I play it safe and keep tax returns and documentation for seven years. Then… they hit the shredder.

What about other items like utility bills, bank statements, credit card statement, etc? Jim Miller, author of Savvy Living and a frequent contributor on “The Today Show” gives these guidelines:

Utility, phone bills. Once your next bill shows up and it reflects your last payment, there’s no reason to keep a bill for utilities, phone, or other monthly service. Some people do like to save a year’s worth to monitor how their energy use varies.

Exception: If you have a home office which you claim on your taxes, keep the bills with the relevant tax returns for seven years. Credit cards receipts/statements. Once you get the next statement and verify that it reflects your payments and the information is accurate, there’s no need to keep the statement.

Exceptions: if there are items you purchased that have warranties, that you may want to return, or that appear on your tax returns, keep them. If there is a tax-related item, tuck the statement away with your current year tax information so you won’t forget it at tax time.

Bank statements, ATM receipts. Most sources say to keep a year’s worth of statements after verifying monthly that the information is accurate. You only need to keep ATM receipts until you check them against the statement. Or better yet, get your statements online and save them electronically. At year’s end, check to see that bank documents you receive, like 1099s or 1098s match what is on the statement.

Paper pay stubs. Save for a year and compare to your W-2. If the W-2 is accurate, you don’t need to save them any longer.

Individual Retirement Account (IRA) statements. The IRS requires that you keep this documentation while you have money in the accounts. Even after you close the accounts, keep for the statute of limitations on the relevant tax returns.

Securities. Keep detailed records of all transactions – dates, quantities, investment fees, dividend reinvestments – for as long as you own the investments plus the tax return statute of limitations.

Real estate records. Keep all records related to property you own –like costs to improve, insurance claims, refinancing documents, etc. – until at least three years after you sell the property and have reported the sale or disposition on your tax return.

 

A Mountain of Paper to Dispose Of?

Of course you can burn them in a fireplace or burn barrel. Or, if you have a ton of paperwork to destroy, don’t put it off, like I did. There’s likely to be a shredding service somewhere near you. They may even shred them while you watch, if you ask. After years as an accountant I had two big tubs of paperwork that had finally passed the statute of limitations. To my surprise, it cost only $15 to have it all shredded.

 

Teresa Ambord is a former accountant and Enrolled Agent with the IRS. Now she writes full time from her home, mostly for business, and about family when the inspiration strikes.

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