Personal Records Retention

We are often asked “What papers do I save, and how long must I save them?”
 
We hope the following guidelines will prove helpful. 

Records that support your tax return:
(1099’s, w2’s, receipts for charitable contributions, medical expenses, taxes, etc, business records, bank statements)
 The statute of limitations (which is the period of time the IRS can generally audit your return and assess additional taxes due) is three years from the due date of the return.  We recommend retaining records that support income and deductions on your tax return for 5 years to allow a cushion.  If the IRS suspects fraud, the statute of limitations is extended.
 
Records that don’t support your tax return:  (utility bills, personal expense checks, non-business interest, credit card receipts, etc.) 
There are no tax reasons to retain these items.  You may wish to retain the items for other reasons; however, we strongly recommend setting up file folders for the following receipts:
 
Permanent records:

1. Personal residence:   Start this file with a copy of the original purchase documents and any subsequent refinancing documents.  Accumulate all receipts for all improvements to your home.  Some often missed items are drapes and curtains, landscaping, patios and other cement work, sprinkler systems, new water heaters and cooling/heating units, carpets and linoleum, and appliances that remain in the home.  This will provide us with the information we will need to calculate the cost of your home, including improvements, original escrow fees, and refinancing fees when you sell the home.
2.  Any real property:  Accumulate the same information as your personal residence.
3. Stocks, bonds, partnership interests:  Start with your “buy” statements and retain any information affecting the basis or cost of the investment such as records of stock dividends, stock splits, dividend reinvestment records (most mutual funds provide annual dividend reinvestment summaries), K-1’s for partnerships showing earnings and distributions, and records of non-taxable dividends.
4. Inherited property:    Inherited property takes its basis to you as the value on the date of death (or the alternate valuation date which is 6 months after the date of death if an election is made on a required estate tax return for estates over the estate tax threshold.)  Obtain this information from the executor as soon as possible and retain in your permanent files.
5. Gifted property:  This is a little more complicated.  Obtain from the donor the fair market value of the gift on the date of the gift, ask whether a gift tax return will be filed and the gift tax paid if any, and the cost of the property to the donee.  File this information in your permanent files.

For all investments, please keep in mind that when they are sold, you will need to measure the sales price against the cost to determine the gain you will have to report and pay tax on.  The more costs you keep track of, the less gain we report.