Now that you have all your papers sorted into tidy locations, how long do you have to keep them around? Organize your records in terms of duration of time to retain such as short-term, medium-term and long-term. The length of time to keep a document depends on the nature and purpose of the document. The following are guidelines that may be helpful.
Short-term from 1 to 3 years
Bills for living expenses, except those that support income tax deductions. (Expenses such as utilities are short-term unless you claim a home office deduction)
Papers on insurance policies that no longer exist
Medium-term from 6 to 7 years
Income tax returns and supporting documentation
Cancelled checks and checking account registers
Loan documents for paid-off loans
Long-term or indefinitely
Documents showing retirement plan and IRA contributions
Records regarding tax disputes
Medical history documents
Pension plan and other retirement plan documents
Documents related to Social Security benefits
Statements regarding cost basis of investments or other property
Home owner or sale documents
Home improvement documents and receipts
What the IRS recommends about your record retention (from the IRS website)
How long you should keep the records?
Generally, you need to retain records that back up an income or deduction item until the “period of limitations” for the tax returns runs out. The period of limitations is the period of time in which you can amend your tax return to claim a credit or refund, or that the IRS can assess additional tax.
The following list (from the IRS website) shows the periods of limitations that apply to income tax returns. Unless otherwise noted, the years refer to the period after the return was filed.
If you owe additional tax and the situations described in items 2, 3 and 4 below do not apply to you, then keep your records for 3 years.
If you did not report income that you should have reported and it is more than 25% of the gross income on the return, then keep your records for 6 years.
If you filed a fraudulent return, then keep your records indefinitely.
If you have not filed a return, then keep your records indefinitely.
If you have filed a claim for a credit or refund subsequent to having filed a return, then keep your records for 3 years after the date you filed your original return or 2 years from the date you paid the tax, whichever is later.
If you filed a claim for a loss from worthless securities or bed debt deduction, then keep records for 7 years.
If you have a business, keep all employment tax records for at least 4 years after the date that the tax becomes due to is paid, whichever is later.
When can you toss or shred?
You should retain records that relate to property until the period of limitations expires for the year in which you dispose of the property in a taxable disposition. You need to keep these records to calculate any depreciation, amortization, or depletion deduction and to calculate the gain or loss when you sell or otherwise dispose of the property.
If you have received property in a nontaxable exchange, your basis in the property is the same as the basis of the property you gave up, increased by any money you paid. You need to keep the records on the old property, as well as on the new property, until the period of limitations for the year in which you disposed of the new property in a taxable disposition.
When someone else needs to find your records
Let’s say that you have meticulously retained your records. How will your loved ones find these records if you become disabled or when you pass away? You could show them where you store your documents and hope they remember or you could keep a record of important data and storage locations.
There are many products to help you keep a record for your loved ones. My internet search using the search term “family record organizer book” produced 1,610,000 results. You can use a book or do this on your computer with a CD. If you have an investment advisor, you might ask if they have a free resource for clients. I am currently trying out an organizer on CD that includes sections for legal & financial, practical matters, present & future health and family & friends. The cost was about $25.
You might consider looking into one of these organizers. This is a place where you can record not only the location of important documents, but also critical estate and personal information. It can serve as a guide for those who will care for you, your family and your home.