Partners' Network

Tax and Financial Record Retention Recommendations

Here is a listing of what records you should keep and for how long that my partner Brian Lovett, CPA, JD, and I have prepared. Also, keep in mind that anything that is discarded should be shredded. When organizing your files, please remember these are general rules concerning your records. But don’t get rid of records you will or might need, so go through this listing carefully.

The rules we present here are simplified but comply with the IRS’ requirements. This is a long list and covers s a lot of items, so print it out and use it as a guide.

Income Tax Returns and Related Items

Keep all federal and state income tax returns for at least seven years. Keep supporting documents (i.e. items confirming your income and/or deductions) for a minimum of three years after a return’s filing date or two years after paying the tax if you filed an amended return or a claim for a credit or refund paid later than when the return was filed. You should keep records for seven years if you file a claim for worthless securities or a bad debt deduction. If the IRS claims you did not report income that is more than 25% of your return’s gross income, you must have the records for at least six years back to contest those claims.

In all of these cases, a simple rule is to keep proof of the expenses claimed for four years and everything else for seven years. If you did not file a return or filed a fraudulent return, there is no statute of limitations, so whatever records you have should be retained indefinitely. Employment tax records should be retained for four years after the later of the date the tax became due or was paid.

Put each year’s return and data in an envelope (or on a disk) marked with the tax year and the date (four, six or seven years later) you should dispose of it. If you mark each year’s envelope for seven years, then you do not have to separate the data.

If you have any final tax audit settlement letters, we recommend keeping these letters permanently because some tax authorities have recently been dredging up old items and sending bills without regard to whether they have been settled, and it is much easier to get these canceled if you have the proof on hand.

The tax returns and back-up income data that you keep as described above can also be a “road map” to facilitate settling your affairs or to assist someone handling your affairs. This will provide a very good idea of what assets you have and where they are.

Gift Tax Returns

If you ever made gifts where you filed federal gift tax returns, those returns along with the back-up should be retained forever. These returns will be needed to be filed with estate tax returns or possibly to establish basis.

Mailing Receipts

If you file your return by certified mail or by an authorized express carrier, keep the receipt with your copy of the tax return. Make sure the receipt shows the date the return was mailed and is stamped by the post office or carrier. If your return is filed electronically, keep a copy of the electronic filing confirmation. In the event the return is misplaced or lost by the tax authority, this documentation will save you from having to pay late-filing penalties.

Gifts or Inherited Assets

Keep all records showing your basis in inherited assets and assets received by a gift. These will be needed if you sell the assets and might be needed if you are involved in a marital separation. If you received a gift of property or inherited assets, and you do not have a tax basis, now is a good time to try to get it. Note: the basis of inherited securities is included on the estate tax returns if they were required to be filed.

Wills and Trusts

Obviously, you must keep current wills and trust agreements.However, we recommend retaining old, superseded wills and trusts to indicate a trail of how your thinking developed, especially if your will excludes certain people from receiving bequests or distributions or if the percentages of distributions are altered greatly.To avoid confusion, clearly mark on every page of any superseded agreement that it has been superseded and is no longer in effect.

Residential Property Records

The tax laws allow part of the gain to be tax-free when you sell your residence. However, you still might have to substantiate the amount of the gain. Because of this, you need to keep closing statements from all home purchases and records of amounts spent for home improvements. After a residence is sold, put these papers with your other tax information for that year. We suggest permanently retaining the closing statements and title policies.

Stock and Bond Records

Keep records of your investment (e.g., stocks, mutual funds and bonds) purchases. Besides providing you with a date for determining the type of gain—long-term versus short-term—these records establish your basis in the investments and help to compute the gain/loss when you sell them. In addition, keep records that show return-of-capital dividends and complete back-up of DRIP (dividend reinvestment plan) additions which establish your basis in those shares.

Because of the potential of class-action lawsuits that might affect securities you owned and your need to furnish proof of your period of ownership if you want to be included in the class, we suggest you keep all records of your stocks and bond buys and sells for at least 10 years. However, you should retain all documentation of acquisitions until you dispose of the asset and then include that with your tax data for the year of sale.

Tax tip: If you’ve owned DRIPs or other stocks for many years and do not have the back-up information and want to dispose of those stocks, consider using them instead of cash to make a charitable contribution. You don’t need your basis—you will get a deduction for the full current value of the stock, and you do not have to recognize the capital gain on those shares. You could also contribute them to a donor-advised fund and have the funds distributed to your charities of choice with your own time table.

Medicaid Applications

People applying for Medicaid need to produce all bank and brokerage statements for the full five years before their application date. For this reason, it is suggested you retain these records for at least five years. If there are substantial repayments of prior debt during that five-year period you will need full documentation to have those payments allowed and not added back to the account balances.

Rental Real Estate Records

For any rental real estate or depreciable business property that you own, keep records of the property’s cost, the purchase date, costs of all improvements, the method used to calculate depreciation and a schedule of all depreciation claimed on the property. Maintain these records until you sell or dispose of the property. Once you sell such property, keep these records with the tax return on which you report the sale. You need to keep current leases handy, and we would also retain the immediate preceding leases in case rent control or other claims are made against you and you would need to refer to the older lease.

Partnership and Business Agreements

You should retain all partnership, membership, or corporate organizational, buy/sell or cross-purchase agreements as long as you have an interest in any business interest or entity. You should also retain all basis calculations.

Employment Contracts

Any employment contract, employment-related stock purchase, option, restricted stock or similar agreements should be retained as long as you are employed by the company and then at least through the date of expiration of any of the commitments should they go past your employment. It is also important to have these handy for your heirs if you die and there are limited exercise periods that survive you. We also suggest preparing a separate calendar of exercise dates so you do not lose track of deadlines for any opportunities.

Art, Jewelry and Collectibles

Keep all receipts of purchases and appraisal reports as long as you own the property.The receipts will be needed to substantiate cost basis when sold or if you make gifts of that property or if you need to establish the loss for insurance purposes. In the event you donate any to charitable organizations for their use, you will need the cost basis for reporting the gift for deduction purposes. Note that there are special rules for gifts to charities valued over $500 and also over $5,000, and you should consult with an accountant before making any such gifts.If any are sold, put the receipts with your tax information for the year of sale.

Military Papers

Military benefits, discharge, decorations and perhaps military burial arrangements should be retained permanently. We know someone who applied for, and was granted, partial military disability benefits 65 years after serving in World War II. You will also need your discharge papers when applying for Social Security, veteran’s or certain state’s tax benefits.

Personal Records

Keep a permanent file of your own family’s personal records such as any marriage licenses, divorce agreements, prenuptial agreements, birth certificates, adoption records, name change papers, expired passports, Social Security cards and cemetery deeds…plus, if you have them, family trees and birth and death certificates of parents and grandparents and other close family members.

Retirement Plans

If you have made nondeductible contributions to an IRA, 401k, 403b or employer retirement account, maintaining records of these contributions will facilitate proving, and reducing, the tax liability when funds are withdrawn. You should also retain a back-up of Roth IRA conversions that were taxed. For this, you can keep the tax return for the years the tax was paid. Also, retain all current plan documents and copies of all designation of beneficiary forms. If you do not have copies of your designations of beneficiaries, now is a good time to request them or simply fill out new designations.

Legal Judgments and Loan Satisfactions

We recommend keeping these forever. This is irrefutable proof that you do not owe those debts or obligations.

Insurance Policies

All current and in-force policies should be kept in an easy to access place. This includes every type of insurance policy including life, disability income and long-term care. We suggest also retaining the previous two years’ policies so that you would have a comparison if you need to make a claim and to check rates and coverage.We would retain expired life insurance policies until you request and receive a status report from the insurance company that the policy is no longer in effect.Some old life policies have cash value that will last for quite a few years after the premiums stop being paid.

Warranty Agreements

Keep for one year after expiration.

Escheat Information

Escheat refers to unclaimed funds that have been turned over to a state. If you ever make a claim to recover escheat funds that predate your current address, proof will need to be provided of your relevant prior residences or office addresses. So keep some documentation of your prior addresses such as a phone or utility bill or a bank statement.

General Rule: When in doubt about something – keep it.

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If you have any tax, business or financial issues you want to discuss please do not hesitate to contact me at [email protected].

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