If you’re spending one of Maine’s many rainy spring days to clean up your home or office, you may want to purge yourself of some old paperwork. But before completely cleaning out your filing cabinet or deleting old files from your computer, it’s important to know what you should hold on to and what you should let go.
Federal Tax Records
At Filler & Associates, we suggest keeping your completed tax returns forever in order to prove you filed. But if you absolutely don’t want to keep a lifetime’s worth of tax returns, you should hold on to them for at least six years after they’re due or filed (whichever comes last).
Besides the returns, it’s also a good idea to save records or items that support your tax return until the statute of limitations runs out — which is generally three years from the date of the return or the date you filed (whichever is later). Supporting documents may include canceled checks and receipts for alimony payments, charitable contributions, mortgage interest payments and retirement plan contributions. Having these records is also useful should you want to file an amended tax return during this three-year period. Or, if you have deductions for bad debts or worthless securities, you can take seven years to file an amended return. So be sure to hang on to those items for at least that long if you have them.
So what can you get rid of? In most cases, any records for the 2015 tax year (which you filed a return for in 2016) can get thrown out — as they fall outside the statute of limitations. But be careful. There are some exceptions to the three-year rule. If the IRS believes your income was understated by 25% or more, the statute of limitations for an audit is six years. And if they suspect fraud or you don’t file a return at all, there’s no time limit for the IRS to investigate.
One last thing to consider are records that support figures affecting multiple years. This can include carryovers of charitable deductions or casualty losses for federal disasters. According to the IRS, you should save items like these until the deductions no longer have effect, plus seven years.
State Tax Records
Generally, Maine follows the same federal tax guidelines. In most cases, the statute of limitations for an audit in Maine is three years. But if fraud is suspected or no return was filed, there is no time limit for the Maine Revenue Service to conduct an audit.
Also, if you’ve been (or are currently being) audited by the IRS, the state usually has a right to resolve their own tax issues related to that particular tax year within one year of the IRS completing their audit. So if you are audited, retain any records for at least a year after it’s finished.
Essential Personal Records
Of course, your records are more than just tax returns and their related documents. A few essential documents that you should never discard are the following:
- Birth and death certificates
- Marriage licenses and divorce decrees
- Social Security cards
- Military discharge papers
Make sure to keep these items somewhere secure — like a safe or a deposit box in a bank. If they end up in the wrong hands, they can be used to steal your identity, file bogus tax returns or apply for credit in your name — which can take several years and large sums of money to sort out and fix.
Bills and Receipts
Some of the documents that cause the most clutter are — unsurprisingly — the ones we get most often: bills and receipts. Whether it’s a utility bill or credit card statement, you can generally shred them once a payment clears your account. Or if you’re a bit more conservative, at the year’s end. Also, if you use online services for utilities and banking, see how far back your statements are saved. Knowing what’s saved online may help you determine what you don’t need a physical copy of.
In terms of large purchases — items like jewelry, furniture, appliances and vehicles — keep records and receipts for as long as you own the item. These will come in handy should you ever need to back up an insurance claim if those items become damaged, lost, stolen or destroyed.
Real Estate Records
Regardless if it’s your residence, a vacation home, land or income property, real estate records should be kept for as long as you own the property plus three years after you sell it and report the transaction on your taxes. In addition to purchase records, be sure to save receipts or records for home improvements, insurance claims and refinancing. All these documents will help help determine your adjusted basis in the property, which is required for figuring the taxable gain at the time of its sale. They can also help determine any calculations for rental property or home office deductions.
Investment Account Statements
Investments come with their own set of rules, regulations and — of course — tax considerations. Maintaining records of purchases and sales of stocks and bonds is needed to accurately report taxable events. These records should clearly show transaction dates, quantities, prices, dividend reinvestment and investment expenses — such as brokers’ fees.
Similar to real estate, you should hold onto these records for as long as you have the investment plus the expiration of the statute of limitations for the relevant tax returns. The IRS also requires you to keep Forms 8606, 5498 and 1099-R until all the money is withdrawn from your IRAs. For Roth IRAs, hold onto to all records pertaining to contributions and withdrawals in cases it’s ever questioned. If you close an IRA account — treat its records as you would any other investment: keep them until the statute of limitations expires.
Hopefully this helps clear up what you should clean up. But if you do have lingering questions about old financial documents or are worried about what can and can’t be audited and when — get in touch with us here at Filler & Associates. We’d be happy to help.