Chris Thornburgh 

While diving into your piles and files to finish your tax return, you might as well get everything in order. What do you really need to keep and what can you shred? The truth is, there is no one-size-fits-all answer. It depends on the type of document in question and the situation. For example, you may need to hold on to certain documents longer than legally required for historical or reference purposes such as in a divorce. Let’s look at some common documents and general guidelines.

Tax records

You might be surprised to learn that some tax records should be kept forever, while others vary. Your tax return and W-2 are a handy record of your earnings, which may be needed later. Recently, for example, a new retiree discovered that certain wages were missing from his Social Security record, thus reducing his benefits. He was able to correct the missing wages with proof from his past tax returns and W-2s. If this possibility is of no worry to you, then below are some retention timelines.

As a general rule, save your supporting tax records until the statute of limitations has expired for a potential audit – seven years safely covers most situations. The statute starts running from the later of the date you filed your tax return or its due date.

If you… Then the period is…

File a return and the next three situations below do not apply to you three years.

• Underreport income by more than 25 percent of reported gross income – 6 years.

• File a fraudulent return – No limit

• Do not file a return – No limit

• Filed a claim for loss on worthless securities – 7 years

Other common records to keep permanently

• Essential records should be stored in a safe deposit box or fire safe.

• Vital records (birth, death, marriage, divorce, adoption, etc.).

• Will and trust documents.

• Military discharge papers.

• Retirement and pension records.

• Photos and/or video of valuables.

Records To Keep For 7 Years

• Satisfied loans. Some even recommend keeping these records permanently in the event proof is needed later.

• Sale records of any asset or investment (home or stock for example). Keep records of the related costs for tax purposes.

• Annual investment statement.

Records To Keep For 1 Year

• Paystubs (until you get your W-2)

• Monthly bills (unless needed for tax purposes)

• Bank statements (unless needed for tax purposes)

• Canceled checks (unless needed for tax purposes)

• Credit card receipts (unless needed for tax purposes)

• Quarterly investment statements

Records To Keep For 1 Month Or Less

Sales receipts that you get on a day to day basis should be kept until the warranty expires or you can no longer return the item you purchased. However, if the receipt it needed to substantiate a tax deduction, hold onto it based on the tax record guidelines above. ATM and credit card receipts can be disposed of each month when you reconcile to your monthly statement.

Recordsto keep while active

• Nondeductible IRA contribution support (until all distributions are made from your IRA).

• Annual retirement account summaries.

• Property records including support for any improvements. These

records are important in the event of a taxable sale. Once you’ve sold your property, hold onto receipts for seven years for tax purposes.

• Receipts for big purchases such as jewelry, collectibles, appliances, antiques, etc. should be kept in an insurance file for proof of value in the event of loss or damage.

• Insurance documents.

• Contracts.

The bottom line

The yearly purge can be an issue if uncertainty paralyzes the process. When in doubt, check with a knowledgeable CPA before pitching important paperwork. 

Chris Thornburgh is a CPA and partner at Brown Armstrong Accountancy Corp. Contact her at cthornburgh or 324-4971. The views expressed in this column are her own.

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