May/June 2011 Newsletter

Summer is a great time to declutter your financial files.  Although it is recommended that you keep your tax returns for at least six years, you may want to hold onto them forever, or at least keep a digital copy, because they can provide clues about your income and investments and other tax information that may come in handy in the future.  Hang onto supporting documents such as canceled checks and old receipts for three years after the due date of your return (that is typically how long the IRS has to audit your return unless your income has been significantly underreported).  If you have any self-employment income, keep receipts at least six years.

Records from stock and fund purchases should be kept for as long as you hold the investments.  You will need to report the date, number of shares and price paid on Schedule D to figure your basis when you sell.  You only pay tax on profits above the basis amount, or you may be able to use a loss to offset investment gains and up to $3,000 per year of ordinary income.  Hold onto year-end statements that show reinvested dividends and capital gains distributions so when you sell you don’t end up paying taxes on the same money twice.

Receipts for major home improvements should be kept until you sell.  They may come in handy if you want to show potential buyers how much you have spent on upgrades and you may be able to use certain home-improvement expenses to lower any potential tax on sale profits.  You most likely will not pay taxes on the sale of your principal residence unless you have lived in it for less than two years, you rented out part of it, or your profit on the sale exceeded $250,000 for single filers and $500,000 for married filers.

Destroy your ATM and bank deposit receipts as soon as you check them against your monthly statement.  Keep your payroll stubs until you receive your W-2 for the year.  Unless you deduct home office expenses, shred paper copies of your credit card, utility, phone and cable bills as soon as you get the next bill and it shows your last payment.  If you plan on selling your home soon, you may want to keep your utility receipts to show potential buyers how much utilities tend to cost. 

Any year that you make nondeductible contributions to a traditional IRA, you must file Form 8606 to document the contributions.  Be sure to keep all of those Forms 8606 until you withdraw all the money from your IRA so you won’t end up overpaying your tax bill when you retire and start to withdraw the funds. 

These are all general guidelines for document retention.  In most cases, no legislation or rulings are available to rely on, so if you have specific concerns, contact your attorney.  Keep in mind that it is always a good idea to hang onto documents for at least the recommended period because many of them simply cannot be recreated.  And, very importantly, when you do decide to reduce your outdated files, absolutely be certain to shred them so identity thieves can’t access your personal information.