Personal Finance

Money Matters: Follow these guidelines for retaining financial, tax documents

Q. We’ve downsized from a fairly large house to a small condo. It’s great having all of our living area on one floor but we miss our storage space. We have kept financial records for years based on the fear that we’d be audited or questioned about something or other and would need some documentation. We just bought a shredder but would feel more comfortable if we knew exactly how many years we need to keep certain documents before we start the mass destruction of years of records in numerous boxes. We are most interested in tax documents, divorce records from previous marriages (we’ve been married for over 30 years) home remodeling costs and investment statements. Any advice is welcome.

A. Thirty years of records; I wonder how much those boxes cost to move! I completely understand, every time we’ve moved we’ve drug a bunch of junk with us. These guidelines should help decrease your storage needs and may help some others get rid of clutter, preferably before they relocate.

Divorce decrees should be kept. It has the date of your divorce and the Judge’s signature. In the unlikely but possible event of divorce from your current spouse this may be useful for Social Security benefits. Since you’ve been divorce for over 30 years, other related paperwork is probably ready for the shredder. The other paperwork should be kept if there are still relevant on-going financial or parenting issues.

Federal tax returns and all supporting documents should be kept for three to seven years. Some guides say 3 years after you file or 2 years after you’ve paid the tax, whichever is greater is enough time to keep these records. I’d recommend seven years, especially if you have a complex return, own a small business, have claims for worthless securities or bad debts. Check with your state and keep the state tax returns at least as many years as the state can also conduct an audit.

Annual investment statements are useful to keep track of purchase dates, costs and reinvested dividends/capital gains for mutual funds, stocks and ETFs. It’s suggested to keep these for three years after the date of sale of any investments in non-retirement accounts.

If you have non-deductible IRAs, keep your form 8606 until the IRA is completely distributed. You’ll need these to prove that you have already paid tax on the contributions.

Maintain records of the costs of home improvements for three years after the sale of the home. If you’ve lived in the home for two of the last five years prior to selling, you won’t owe any tax on gains of $250,000 if single and $500,000 if married filing jointly. If you put a lot of money into remodeling a home you could have a substantial increase in the value of your home. You’ll need to document that your cost basis has increased based on the cost of home improvements.

You didn’t mention this but beginning with 2014 you need to keep records that you have maintained minimal essential health insurance. The fines increase significantly in 2016. For those with yearly household income above $83,400 in 2016 the fee can be as high as 2.5 percent of taxable income.

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