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Karen Poff

Knowing what to keep and what to shred

In the aftermath of tax preparation, you may be wondering how you'll be able to survive in the ever-increasing sea of paperwork. From one packrat to another, I know how difficult it is to part with paperwork you are afraid you might need someday. But you really don't need to keep all of it forever. Here are some tips to help you reduce paperwork to a more manageable lake or pond:

First, notice that the title says "what to shred" NOT "what to toss." Be sure to keep your private information safe from identity thieves while you are storing it, as well as when you are ready to discard it. Shred anything you are disposing of with a cross-cut shredder to protect it from prying eyes.

A good place to start with your record-keeping dilemma is Internal Revenue Service (IRS) Publication Number 552, Recordkeeping for Individuals, which you can download at: http://www.irs.gov/pub/irs-pdf/p552.pdf. The IRS requires that you keep records supporting your tax return until the "period of limitations" runs out for that return. If you can still amend a return or the IRS can still assess additional tax on that return, you need the records to back it up. The periods of limitations are listed below:

  • If you have reported your income accurately, have filed your returns, and have not filed fraudulent returns, the period is three years.
  • If you have under-reported your income by more than 25 percent, the period is six years.
  • If you have not filed a return or have filed a fraudulent return, there is no limit.
  • If you file a claim for a credit or a refund after you filed your return, the period is two years after the tax was paid or three years, whichever is later.
  • If you file a claim for a loss from worthless securities, the period is seven years.

So, it seems that if you have filed your tax returns and have not under-reported income or committed fraud, you can keep your records for seven years. However, there are a few other things you need to think about. For example, if you own property, the period of limitations doesn't start until you dispose of the property. If you own a home that means you must keep the records from the day you purchase it until seven years after you sell it, including any improvements to the home. Publication Number 552 covers in detail each component of a tax return and what types of records you might need to support it.

At this point you might be wondering if there is anything you can safely discard. The answer is yes! But since even the experts disagree on how long to keep things, I am not going to give you specific "rules." Instead, I'm suggesting that for each type of record, you take a moment to think about future situations where you might need it. If you are fairly sure you won't need the record, it is probably safe to discard.

Here are a couple of examples:

Receipt for a stereo system - This might be needed to obtain warranty service, so you should keep it at least as long as the warranty is in force. It also might be needed for insurance purposes, if the system is stolen or destroyed in a fire. But your insurance company might accept another written record, such as your household inventory with the date and purchase price recorded. If so, you could discard the receipt. (Check with your insurance company about their policies.) If you are a DJ and the stereo system is business property, you'll need to keep the receipt until seven years after you sell the stereo system or close the business. Why that long? Because the stereo system is being deducted as a business expense and/or depreciated. Owning it will have tax implications until the "period of limitations" runs out after the equipment is sold or the business closed.

Receipt from a grocery store - This might be needed to obtain a refund for a spoiled or faulty product, so you should keep it until you are certain you won't need to return anything. But if the receipt includes medication expenses you will be claiming on your tax return, you will need to keep it much longer - for seven years after the year you use it with your tax return.

Final statement for a loan (showing a zero balance) - This might be needed later to prove that the debt was paid in full. Old debts, sometimes known as "zombie" debts, can surface later when debt collectors try to collect again. Having the statement easily resolves the dispute. How much later can old debts surface? I can't say for sure. But since it is just one piece of paper for each loan, I choose to keep it forever.

Going through this thought process for each type of record can seem difficult, but it will prevent problems you might have with just using "rules of thumb." For example, some guidelines say that you can throw out credit card statements after the next one arrives or after one year. My credit card statements, though, include records and receipts for home improvements which we will need for tax documentation until seven years after we sell the house. Since I have been stapling receipts to my credit card statements for the past 30 years, I would have a lot of sorting to do if I wanted to discard my credit card statements.

As you can see, where you keep your records and how you organize them can impact how long you need to keep things. I've finally discovered that receipts for warranty purposes might be more effectively stored with the owner's manual for the item. And receipts for home improvements should probably be put with my tax records for the current year. But reorganizing 30 years of records is a daunting task. Perhaps when I retire... Hopefully, you are reading this blog early in life and can learn from my mistakes.

If you would like to learn more about how to keep good financial records, contact us for information about our Managing Your Money series, which is offered continually in localities throughout the Northern Shenandoah Valley. A new series starts in Woodstock on Oct.r 18.

Call me at 540-459-6140, email me at kpoff@vt.edu, or call your local office of Virginia Cooperative Extension. You can download a copy of the registration flyer at the following url: http://offices.ext.vt.edu/shenandoah/programs/fcs/Files/Managing_Your_Money_Series_Spring_2012_Flyer.pdf


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Author - Brittany Michael Author - Karen Poff Author - Karen Ridings Family & Human Development Family Financial Management Food, Nutrition, Health

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