I was working on my spring housecleaning the
other day ( I know I was supposed to do this three months ago
but tax season got in the way!) and came across an article that
dealt with record retention suggestions from a few years ago.
Since life has changed a little in the financial world, I
decided this would be a great topic for a blog.
The IRS has added a few new forms in the recent past to our
tax returns and we have all aged a few more years bringing us
closer to when we will be retired and looking to withdraw money
from our retirement accounts. All this raises issues about what
records we should be keeping and what records we can get rid
of.
High on the list of why to get rid of records we do not need
anymore is the protection of our identity from people lurking
to steal our identities. So any records that we can get rid of
that have information about our name, social security number,
address, etc., should be destroyed by shredding ourselves or
going to a place that does shredding. Be sure that the shredder
you use is a cross-cut shredder (old-style straight cut
shredders leave too much opportunity to figure out the
sensitive information on your documents). Should you be
thinking of doing this, review what you are thinking of
shredding to be sure that the following types of records will
not be needed in the future:
- Records supporting what you have reported on your tax
returns for the past 6 years should be retained in case of an
audit. While the audit period for the IRS is normally 3
years, they do have the ability to go back 6 years if they
believe that there is a reason to suspect underreporting of
income or over claiming of deductions.
- If you have an investment portfolio that contains
purchases from years ago, you should be sure to keep the
records that show each purchase to support your cost basis.
This would be especially true if you were purchasing stocks
or mutual funds and reinvesting the periodic dividends and
capital gains automatically. I have had clients who bought a
major utility 20 years ago and reinvested the dividends every
quarter for twenty years, had numerous stock splits and is
sitting with over 4,000 shares today. There are numerous
blocks of cost basis to choose from if they were to sell
today, ranging from $1.50 to $35.00 per share. This gives
them both gains and losses if they should sell to choose from
but the burden is on them to prove it when they do sell and
to report this information to the broker so the broker can
report it on the brokerage 1099 statement at year end.
- Perhaps you invested in IRAs each year and did not take a
tax deduction on your tax return in the year of the
contribution, maybe 20 years ago. Each of these contributions
are considered "cost basis" that will reduce the amount of
taxable income when you take a withdrawal from the IRA in
retirement. Again, it is your responsibility to document what
your cost basis is when you report that on Form 8606 in your
tax return. This is an area where you are the only one who
knows what you did at tax time. So I would suggest you keep
the Form 1040 for that year as well as the Form 5498 for that
year. Form 5498 confirms that you made a contribution to the
IRA or the Roth IRA and the Form 1040 shows whether you took
a tax deduction for it that year. You may recall that back in
1998 when the Roth IRA was introduced, you had the
opportunity to do a conversion of IRAs to Roth IRA and pay
the tax over 4 years. This same opportunity was available in
2010 to convert and pay the tax in 2011 and 2012. I had a few
clients who did the conversion in 1998 and they actually
exercised their option to recharacterize the conversion back
to an IRA which resulted in them doing the conversion again
in 2010. Fortunately the clients had the above referenced
documents to show this so that we could then reduce the
converted amount of taxable income by their cost basis.
Without that documentation being available, I would not have
been able to file their tax return and show the cost basis as
being not taxable.
- If you are one who contributes household items to
charities to take a tax deduction, you may want to make a
habit of keeping the purchase receipts of major items you buy
to help support the value you will assign to the articles
when you donate them to a charity. I am not suggesting that
you can claim the price you paid but it does help to support
how expensive the items are should the IRS want to question
whether you buy expensive or inexpensive items that would
then influence the value being claimed.
- If you operate a business and have equipment to claim on
the return for depreciation, including the use of your car,
you will want to keep the documents that show what you paid
for the item and when it was purchased. These records will be
needed for at least three years after the last year you have
claimed it on a tax return. I would also note that if the
item is no longer used in the business but you are still
using it for personal reasons, you have a disposition of a
business asset to reflect in the return when that occurs. An
example may be the computer that your child is now using that
you claimed 100% depreciation on your Schedule C for the past
three years. It has a value to be reflected on your Schedule
C as a sale of an asset. Or maybe it is the car that you used
in business that is now used by your child to get to
school.
There may be other documents you need to keep but this will
get you started at relieving the clutter in your life. Enjoy
the opportunity to open up some space around you.
Francis St. Onge, CFP®
President
Total Financial Planning, LLC
Brighton, MI