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Which Financial Records Can You Toss?

A post-tax season guide to keeping and trashing paperwork

By Rosie Wolf Williams

You’ve finished your 2016 taxes and all the accompanying financial papers that went with it. So this is a good time to shred or trash the records you don’t need and, while you’re at it, others taking up space. But which financial records do you absolutely need to keep and which can you toss?

This kind of glut is a problem many of us face, says Robert Spielman, a New York City tax partner at Marcum, an accounting and financial advisory firm. And, after all, who wouldn’t want to go glut-free?

“We all have boxes in the basement or attic or someplace offsite. We store these documents with the expectation that we might need them,” says Spielman. “The odds are those documents have spider webs. We’ve never looked at them because we’ve never needed them. There’s also the general rule that as soon as you throw something out, you will need it.”

Taxes and Financial Records

As a rule, you need to keep tax records for three years from the date you filed your return, in case of a federal tax audit. But, says Howard Atlas, an elder law attorney and principal of the Atlas Law Group in New York City, there is an exception to that rule. “If you omit 25 percent of your gross income, that audit time goes up to six years,” he notes.

The Internal Revenue Service also recommends keeping records for seven years if you file a claim for a loss from worthless securities or a bad-debt deduction. (State tax agencies have their own rules for state returns.)

Regardless of the audit time limit, Atlas says, “I always recommend that you keep your tax returns. The supporting documentation, you could get rid of that after three years, but keep the return itself.” Keeping a copy of all your tax returns offers evidence that they were prepared, in case the IRS ever has doubts, notes Spielman.

So if you didn’t need pay stubs, utility bills, cancelled checks, credit card receipts or bank statements for tax documentation, you can junk them after a year.

Going Digital

One way to handle the clutter of tax documentation is to scan supporting paperwork — such as receipts and cancelled checks — into a printable digital file. Electronic storage is becoming more widely accepted and recognized as sufficient for legal purposes, says Spielman.

Just be sure the digital file you have is no longer an obsolete technology. Maintaining and upgrading software as well as secure storage are highly important.

Financial Records to Keep

Spielman and Atlas suggest keeping (among others): original or certified copies of birth certificates or adoption papers; marriage and divorce decrees; naturalization papers; military discharge documents; Social Security cards; current insurance policies; beneficiary designations and updated wills and trusts. These documents could be requested to satisfy estates upon your death.

You may also want to keep all your medical records, says Spielman, if you suffer from a chronic illness or had an injury involving litigation.

Your Investments

As for statements about your investments from your broker, mutual fund or bank, hold onto ones noting any purchases and sales. Says Atlas, “You want to keep a record of that [investment’s] purchase price. When you sell it, you can be subject to capital gains tax.” Hang onto the purchase and sale information for three years past the tax year that reflects the sale.

Your Home

Financial records regarding your home’s purchase price, sales price and improvements that added value or prolonged its life are important to keep for tax purposes. You’ll need them to determine whether you owe capital gains when you sell, and if so, how much.

Generally speaking, the first $250,000 of gain on a primary residence isn’t taxable; $500,000 if you’re married and filing jointly.

The IRS lets you add the price of some home improvements to what’s known as your “cost basis,” ultimately lowering any capital gains you’ll owe on the sale. (You can see all the rules in IRS’ Publication 523).  Keep home improvement receipts for three years after you sell the home.


Financial Records and Inheritances

If someone gives you something while he or she is alive (a family home, for example), you take on that person’s cost basis at the time of the original purchase. But if you inherit an item after a death, the basis — that is, the starting point for calculating a gain or loss — is usually the value at the time of death.

Keep any financial records that will help you prove any gain or loss for property you inherit. You’ll want to have copies of the death certificate for the person who owned the property you inherited, so you have evidence of the date of death.

Financial Records for Medicaid

If you want Medicaid to pay for nursing home costs, you’ll be required to show all your financial transactions for the prior five years — it’s called the “look back period.” That’s so Medicaid can see if you were giving away assets to reduce your holdings enough so you could qualify for Medicaid. If Medicaid determines you did that, you may be deemed ineligible for coverage.

Says Atlas: “They will want to see every monthly statement. Every transaction over a certain amount has to be explained. They are going to ask you for every bank account, every investment account and every monthly statement for five years. If you have closed an account in the last five years, they will want to see that one, too.”

Access to Your Financial Records

Don’t keep important paperwork in a bank safe deposit box. Often, surviving spouses or relatives are locked out of these boxes after a death and then need a court order to open them. A fire-safe security lock box in your home is a better option.

Be sure your spouse or significant other knows where your records are and how to access them if necessary. This person should also have a copy of all your passwords and usernames for your financial accounts.

Don’t Go Overboard Ridding Financial Records

Both Spielman and Atlas advise paying careful attention to the process of eliminating paperwork. Sometimes priceless family memories and important artifacts (like citizenship papers) can be scattered among what otherwise look like unnecessary files.

“There are two kinds of things you need to save — things you need because you might need them for a tax, business or personal matter,” says Spielman, “and those things you need to save because you want them close to your heart, or preserve them for other generations.”

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Rosie Wolf Williams
Rosie Wolf Williams is a freelance writer whose work has appeared in USA Weekend, Woman's Day, AARP the Magazine and elsewhere. Read More
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