Remember the prediction years ago that computers and electronic money would turn us into a paperless society? Well, it seems today that we are deluged with more paper than ever.
Bills, canceled checks, ATM and credit card receipts, bank and investment statements bulge from pockets and wallets and spill out of drawers and shoe boxes.
What must you keep? What can you throw out? And if you do purge paperwork, will you realize a pack rat's worst fear: Needing something that's long since been tossed.
Ron Oden, a retired electronic technician in Timonium, knows a lot about paper.
He has canceled checks going back 10 years. He keeps all of his investment statements and retains copies of transactions for securities he hasn't owned for a dozen years. A safe holds his most important papers, but the overflow is stored in a set of drawers in his dining room. "I haven't thrown anything out at all," said Oden, 73.
Well, three years ago, Oden did discard tax returns more than 6 years old. "I had tax returns stacked up since I [delivered] newspapers as a boy from the early 1940s," he said. Unfortunately, he discovered too late that he had pitched a document he wanted.
"Most people go to one extreme or the other," said Tom Pudner, a KPMG LLP accountant in Washington. "There are people who save more than they need to and there are some throwing away the wrong things. That can be worse because they need to track things down."
Now is a good time to cull records as taxpayers prepare to file returns, experts said. Pudner advises people to create three files: a permanent file and one each for taxes this year and next year.
The permanent file should contain documents you need to hold indefinitely or for decades, such as deeds, copies of tax returns and papers related to pensions or a home purchase, experts said.
Keep W-2 forms, which detail annual income and taxes withheld, in the permanent file until you begin collecting Social Security benefits, advised Connie Kurtz, an enrolled agent in Rockville. W-2s can clear up disputes with the Social Security Administration about your income or work history that can affect benefits, she said.
The tax files should contain papers that back up numbers used on returns, such as donations, mortgage interest payments, and dividends and interest earned on investments and other accounts.
Some records have special rules:
Charitable donations. You should save a canceled check or receipt for anything given to charity, Pudner said. If the donation is $250 or more, you must have a receipt or letter from the charity acknowledging the gift if you want to deduct the contribution from your taxes.
Investments. Save statements related to the purchase of securities and reinvested dividends to establish a cost basis, which will help determine the capital gains or loss when you sell the investments.
You must keep these records for as long as you own the securities and for at least three years after selling them, experts said.
Keep quarterly statements from mutual fund statements and dividend reinvestment plans, or DRIPs, during the year, Pudner said. At year's end, you can throw out the reports when you receive the fund or DRIPs' annual summary statement, he said.
Home improvements. Keep receipts from the cost of improvements that will add value to the house, such as erecting a deck or remodeling the kitchen, and potentially reduce taxes later.
When selling a house, singles can exclude up to $250,000 in gains from income taxes, while married couples can exclude up to $500,000. Because of the high limits, many people don't pay taxes on the sale of a house. But if your home appreciates even more, adding the cost of improvements to the original purchase price could reduce the size of recognized gains.
Or, if you someday rent the house, the cost of improvements can be added to the original price and help lower your taxes when you depreciate the asset over time, Pudner said.
Medical expenses. Taxpayers can deduct medical costs that exceed 7.5 percent of their adjusted gross income, but many people's medical bills don't come near that, Pudner said. Still, those undergoing major medical procedures during the year and seniors in ill health should keep receipts in case they meet the threshold, he said.
So, how long do you save documents that don't make it into a permanent file? Generally, save them for at least three years, although some tax experts recommend seven years to be safe.
The IRS can audit a return up to three years after it's filed or its due date, whichever is later, so you will need to keep supporting tax documentation for that period, experts said. But if you have under reported your income by more than 25 percent, the IRS' audit can reach back six years.
And if you write off the loss of an investment or bad loan, the IRS can go back seven years to review the loss.
The long arm of the IRS is not restrained by time limits if you fail to file a return when required or submit a fraudulent return.
