Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: MONDAY, January 10, 1994 TAG: 9401070244
SECTION: MONEY PAGE: A-8 EDITION: METRO
SOURCE: MAG POFF STAFF WRITER
DATELINE: LENGTH: Long
One type is like the squirrel. He has boxes of 1975 mutual fund summaries, drawers stuffed with bank statements from 1980 and envelopes holding receipts from untold years.
The second breed travels light. He can't produce documents to prove the cost of the addition to the house, much less the fact that taxes were paid on an Individual Retirement Account or yesterday's cash payment to an open retailer's account.
Both of these people are in error. Many financial records can - and should be - discarded fairly quickly.
Some records, on the other hand, should be saved forever. The new year is a good time to do some housekeeping with financial records.
Take the case of state and federal income tax returns.
Most experts agree that you should save your returns for at least six years.
Gary Duerk, a certified public accountant with the Roanoke firm of Brown, Edwards & Co., said taxpayers have three years to amend an old return. The government supposedly has the same period to audit it.
But the government can audit up to six years later if it alleges a substantial under-reporting of taxes, Duerk said. That means a taxpayer must keep the returns for at least seven years in order to answer questions from the IRS.
If the IRS contends you are guilty of fraud, however, there is no limit on how far back it can delve into your records.
Duerk's advice about income tax returns is "keep them for a lifetime."
There's more reason to save them than simply hedging against the unlikely possibility of a long-delayed federal or state tax audit.
Duerk said he often sees old tax returns used as evidence of income in divorce and child-support proceedings.
"You can be sued over anything," Duerk said, so you should be in a position to prove the history of your income.
Then, too, tax time is the only occasion when most people sit down and really record their finances.
Tax returns, therefore, are "a little snapshot of what you did - a look at the past." You can review the returns and determine the progress you are making in income and assets.
After seven years, you can discard the backup information on which you based the return.
Never throw away an estate tax return, Duerk advised. At the very least, they must be kept several years after you dispose of the inherited assets.
The estate tax return, Duerk said, is evidence of your own tax basis when you sell the property you inherited. Your tax basis is the value of the house, stock or other asset on the date of the original owner's death, a figure that shows up in the tax return.
When it comes to your house, Duerk said you should save the closing statement as long as you live there.
Use a file folder or large envelope, he suggested. If you finish the basement, remodel the bath, upgrade the kitchen or add carpeting, copies of your bills and checks must go inside the envelope.
When you sell the house, your tax basis is the original price plus the cost of all improvements that increase the value of the home.
After several years in a house, Duerk pointed out, you won't be able to remember all of the improvements, much less the cost. And it's up to you to prove the expense.
A home improvement is something that adds to the value of the house, such as a new deck or an extra room. Duerk said you can throw out bills for routine maintenance, such as painting or replacement guttering.
The envelope of house records is used to support the tax return in which you account for the tax basis and investment in a new home. Duerk said they can be discarded seven years after the house is sold - although the tax return itself is saved.
In handling stocks, you save the purchase confirmation until the stock is sold. Then those records become part of the seven-year support for the tax return.
Mutual funds are more of a problem.
You can discard the monthly (or quarterly) statements when you receive the annual summary, Duerk said. But, the yearly reports must be retained.
He explained that those reports show the money you invested, the reinvested dividends on which you have been taxed and, in the case of some funds, principal which has been returned. When you sell the fund, these items can be subtracted from the amount of your gain.
Stock and mutual fund statements also should be kept seven years after taxes have been paid.
Records pertaining to your Individual Retirement Accounts must be saved for a lifetime.
At retirement, maybe 20 or 30 years from now, you must be able to show any share of the contributions that were already taxed.
Unless you can prove to the contrary, the government will assume no taxes have been paid - another good reason to save current tax returns.
The title to your car should be kept, preferably in a bank lock box, as long as you own the car.
Duerk said your car's file folder should hold all maintenance records, letters to a dealer about problems and even the yearly safety inspection stickers. The last, he said, constitute evidence of actual mileage on the car.
Checks can go into the trash after seven years unless they pertain to a business, Duerk said.
Before throwing them out, however, look at each check. Duerk said checks for payment of taxes, home improvements, contracts and the like should be saved.
Important checks should not be written against money market mutual funds, which don't return the checks. If the payment pertains to a house, taxes or the like, Duerk said, transfer the funds to a standard checking account.
Duerk would throw away credit card statements after a few months unless they pertain to a business. You will, of course, save the original slips showing deductible payments, such as medical bills.
Records of insurance claims should be saved permanently, Duerk said. Expired insurance policies should be kept for at least three years in case of an unexpected claim against you.
by CNB