Wednesday, April 28, 2010

Houston Probate Attorney Reveals How Long You Should REALLY Keep Personal Records—and WHY

From the Desk of Kim Hegwood, Houston Probate Attorney

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Have you ever seen those television specials about "hoarders"? These are the people who amass incredible amounts of stuff in their homes--often because they have experienced some kind of trauma or pain which drives them to become emotionally-attached to every scrap of their material possessions (or even trash).

 I watched one of these stories recently...and they can break your heart. These folks seem to need much more help than the typically-prescribed professional "organizer". The roots just run so deep.  But, it did help my daughter clean her room!

 Well, as a Houston probate attorney, I wanted to let you know that family financial records should also go through a "cleanse" from time to time, and after tax day is a good time to take it up.

(By the way, i'd be remiss as a Houston probate attorney if I did not say that this is something for every generation, even--and perhaps, especially--loved ones who have passed on. There is a rising tide of identity theft among the deceased, and financial records are a big reason why.)

So, I have put together a good primer for you on the subject, as well as some quick advice about what to do if you find something that can affect you NOW, as occasionally happens.  So let’s dive right into:

What To Do With Your Records (& Why)

Now is the best time to get rid of unnecessary paperwork, as well as to ensure that you and your accountant caught everything for your '09 tax return.

But before I get to what to do if you find something pertinent to your recently-filed tax return, here is a guide for how long to keep your records...

Taxes: Seven years

Reasons Why:

There are three, actually:

1) The IRS has three years from your filing date to audit your return if it suspects good-faith errors.

2)  The three-year deadline also applies if you would like to make some sort of amendment because you discover a mistake in your return and can claim a refund.

3)  The IRS has six years to challenge your return if it thinks you underreported your gross income.

All this adds up to keeping that info for seven years. Beyond that, there is no reason--except for posterity.

IRA contribution records: Permanently

Reasons Why: You will need to be able to prove that you already paid tax on this money when the time comes to withdraw.

Bank records: Usually just one year

Reasons Why:

Those related to your taxes, business expenses, home improvements and mortgage payments will obviously need to be included for next year's taxes. But unless there is some sort of emotional or posterity reason, get rid of everything after one year.

Brokerage statements: Until you sell

Reasons Why:

To prove whether or not you have a capital gain or loss for tax purposes; after this point, shred it.

Household Bills: From one year to permanently

Reasons Why:

When the canceled check from a paid bill has been returned, you can shred the bill with a clear conscience. However, bills for big purchases -- such as jewelry, rugs, appliances, antiques, cars, collectibles, furniture, computers, etc. -- should be kept in an insurance file for proof of their value in the event of loss or damage.

Credit card receipts and statements: 45 days/Seven years

Reasons Why:

Some families do not even bother to match up their statements, but if you do so, shred the receipts once you have verified everything. There is no reason to keep everyday receipts beyond this point. For tax-related purchases, you need only keep the statements for seven years--after that, shred it, baby!

Paycheck stubs: One year

Reasons Why:

This is to verify that when you receive your annual W-2 form from your employer, the information from your stubs match. If so, shred all of the stubs...if not, request a corrected form, known as a W-2c. After that has been handled--shred.

House/condominium records: Six years/permanently

Reasons Why:

You will want to keep all records documenting the purchase price and the cost of permanent improvements -- such as remodeling, additions and installations as well as records of expenses incurred in selling and buying the property, such as legal fees and your real estate agent's commission, for six years after you sell your home.

Holding on to these records is important because any improvements you make on your house, as well as expenses in selling it, are added to the original purchase price or cost basis. Therefore, you lower your capital gains tax when you sell your house.

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Now, in this cleansing process, sometimes, you will find a receipt or a documentation which really would have changed your prior year tax return. That is when you might have your preparer file an "Amended Return". However, this decision should be balanced against the cost of doing so, as well as the expected benefit--often these items can be dealt with the following year.

But here are some other, common reasons to amend...

* You neglected to report some income earned.

* You claimed deductions or credits you should not have claimed.

* You did not claim deductions or credits you could have claimed.

* You filed under one filing status, but you should have filed under another.

* You bought a residence and did not claim the First Time  Homebuyers Credit (or other credits available).

These are items to take up with your accountant.

I, as a Houston estate planning attorney, am simply providing you here with common-sense advice about what to keep, and what to shred. Let it be a cleansing process for you, and sleep easy knowing you have handled this stuff properly!

Oh, and make sure you use a good shredder!