What documents to keep, and for how long

Dollars & Sense

November 30, 2003|By KNIGHT RIDDER/TRIBUNE

Many of us keep far more financial records in our home than is necessary. Others don't keep what they should, or if they do, they can't find a document when they need it.

To keep your home from becoming a firetrap or a document trap, be selective about what you keep.

There are just two rules:

No. 1: "It's not so important as to what system a person uses when organizing documents of this nature," says Barry Izsak, president of the National Association of Professional Organizers, a group of consultants who help consumers with organization needs. "Create a system that works for you and stick to that system," he advises.

No. 2: Shred financial documents before discarding them. Don't set yourself up to be a victim of identity theft.

That said, here are guidelines to keeping financial documents.

Tax records: You should keep your tax returns for at least six years.

"If there is underreported income, the IRS can go back six years in its audit," says Phil Beasley, spokesman for the Internal Revenue Service in Dallas.

That's the minimum, though.

"If you end up in an audit situation," says Betty J. Maines, a certified public accountant and senior tax manager at Deloitte & Touche LLP in Dallas, "the IRS can always ask you to sign a document that lengthens your statute of limitations."

Well-organized records will make it easier to prepare your tax return and will help you substantiate tax breaks you have claimed, if you are audited or if the government bills you for additional tax.

Receipts, canceled checks and other documents that support an item of income or deduction on your return should be kept until the statute of limitations expires for that return. Typically that is three years from the date the original return was filed or two years from the date the tax was paid, whichever is later.

Give yourself three more years as a cushion, Beasley says.

There is no statute of limitations when a return is fraudulent or when no return is filed.

For more information, get a copy of Publication 552: Recordkeeping for Individuals from the Internal Revenue Service. You can get a free copy by going to the IRS' Web site at www.irs.gov.

Real estate: You should keep records to help determine the "basis" of your home or other property.

"If you have rental property or any kind of investments, you may want to hang on to your tax returns for as long as you own those investments, in case you need to go back and figure out what your original investment was," Beasley says.

Your basis is the original cost of your home and is used to calculate a gain or loss when you sell your home or to figure depreciation if you use part of your home for business purposes or rent.

If you do home improvements, keep your receipts and records, because if you sell your home and have to pay capital gains tax, that amount will be added to your basis and cut your tax bill.

The higher the basis, the smaller the gain and the less tax you will owe. In the case of a loss, the higher the basis, the bigger the loss, and the bigger the reduction in taxable income.

Mortgage documents: Hold on to them as long as you own the property.

Bank and investment statements: Keep them as long you need to substantiate claims made on your tax return or to verify transactions.

Credit card statements: Keep them long enough to verify your purchase and to ensure that no one has made any unauthorized charges on your account.

Many credit card companies offer a year-end summary of your transactions.

"Hold on to them if you have to dispute a charge," says Jordan Goodman, author of several personal finance books.

"Once something's paid and done, you don't have to hold on to them anymore."

Insurance policies: Keep them as long as you have the policy.

Pay stubs: Once you've reconciled them with your W-2 annual wage and tax statement, you don't need to keep them.

Utility bills: "If you are satisfied with what's on the bill and you've paid it and you agree with everything, there should be no need to keep them," says Terry Hadley, spokesman for the Public Utility Commission of Texas.

Keeping your bills would be helpful, however, if you've switched to a new electric company and have signed a contract to purchase electricity for a certain period, he says.

"You might want to save all bills for the length of the contract so that you can make sure you are being charged the right amount," Hadley says.

Regarding telephone bills, officials of SBC Communications Inc. say consumers should keep their bills "as long as they see fit," adding that the company keeps copies of bills for several years.

In addition, the company's eBill service enables customers to view and print out their bills online for the previous six months.

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