THROW AWAY WHAT YOU DON'T NEED
As a general rule, human beings are collectors. We collect everything from art, coins, crystal, and silver to faded Levi's, Beanie Babies, baseball cards, and Michael Jordan's old basketball shoes. We also save stuff we won't ever need and that has no intrinsic value whatsoever, like tickets from the first date with one's spouse.
But getting your finances in order means parting with some of these "treasures." You want to clear out the clutter, or at least simplify the paperwork that you're going to keep in your newly organized personal finance space. Here's a list of important papers you should keep, why you need them, and when you can throw them away:
1. Federal and state income tax returns. Under current tax law, the Internal Revenue Service (IRS) may audit you for three to six years after you've filed your federal income tax return. While they can only ask for receipts for up to six years, depending on the situation, if they believe you intentionally failed to report income, or filed a fraudulent tax return, there is no statute of limitations. Your best bet is to keep a copy of your tax return each year, along with all of the backup information.
2. Investment information. You need to know three things about your investments: how much you paid for them, how much you sold them for, and what kind of annual you earned while you held them. When you buy or sell an investment, your brokerage company will typically send you a confirmation. Hold on to it. You'll ultimately need that information, plus the dividend statements for your stock and mutual fund investments.
3. Retirement account records and paycheck stubs. If you've been making periodic contributions to an IRA, or if you've started a Roth IRA (see Simple Thing 47), there are certain tax records you should keep until you've withdrawn all funds from these accounts, to prove the amount of the nontaxable portion. Current tax law requires you to keep Forms 1040, 8606, 1099R, and 5498 for each year in which you made a contribution to your IRA accounts. Keep your paycheck stubs for each calendar year until you've received your W-2 form (usually in January) and checked it against your paycheck stubs for errors.
4. Insurance policies. You'll buy many different types of insurance in your life, including homeowner's, life, medical, auto, disability, and liability. You may even purchase various insurance policies for estate tax purposes. Keep the original insurance policy and signed contract for as long as you hold the policy. Once you cancel the insurance, you can throw out the policy papers about two years later.
5. Trusts and other estate-planning devices. Many individuals use trusts and other types of estate-planning tools to save on estate taxes. You'll need to keep trust documents, as well as backup documentation, for as long as those accounts are active.
6. Medical records. Current tax law permits you to deduct medical expenses in excess of 7.5 percent of your adjusted gross income (AGI). For example, if your AGI is $50,000, you may deduct the amount of medical expenses you paid that year in excess of $3,750, excluding medical insurance premiums. You'll want to keep all of your med- ical bills until the claim has been settled. If y0u have an ongoing medical situation, you may wish to keep these papers indefinitely, or until you've settled the claim. If you don't have enough medical bills to deduct anything from your tax return, toss them after you file your return and be glad you're in relatively good health.
7. Credit card receipts and statements. Once you receive your monthly statement listing your most recent payment and any items purchased (or returned) since the previous statement, you can toss out the credit card receipts for that month's activity. (Of course, if you have your own business, different rules apply). But if you think you'll ever need a receipt, or if something has a "lifetime" warranty, you may want to hold on to it. If you're fighting with a store about an erroneous charge, or waiting for a store credit, you should keep your statements until that situation is resolved. Also, keep your receipt if you think you may want to return the item. After you've closed out your year and done your taxes, you can toss out your receipts at that point. If you're using financial software and don't need a receipt for tax purposes, to return an item, or for the warranty, you can toss the receipt as soon as you've entered it.
8. Household bills and receipts. It would be great if you could deduct the cost of food, heat, electricity, and diapers. Unfortunately, you can't. But you may be able to deduct the cost of child care or school tuition. After you've recorded the general household bills into your electronic software program or other expense ledger, you can toss them. Keep child-care receipts and tuition bills with your tax return files. If you qualify for a tax deduction, make those receipts part of your permanent tax records.
9. Canceled checks, ATM receipts, bank statements. Keep copies of your account statements, for IRS purposes, at least six years, and possibly forever. ATM receipts should be kept until the transactions they document show up on your bank statement. You can toss canceled checks after a year unless they document deductions or capital improvements.
10. Mortgage, home-equity loan, second mortgage, and property-tax records. Current tax law allows you to deduct interest paid on a first mortgage, a home-equity loan, or a second mortgage up to $1.1 million spread over two homes. You may also deduct your property taxes. Mortgage servicing companies will typically send you a year-end statement listing the amount of interest you've paid over the year, and the real estate and insurance premiums paid by the company on your behalf, if they escrow your tax and insurance payments. You'll need this statement and your property-tax bills when preparing your income tax return. After you file your return, it should become part of your permanent tax records.
11. Home purchase/sale and capital improvements records. Although current tax law permits you to take up to $250,000 in profits tax-free (up to $500,000 if you're married), you'll still want to hold on to your records so that you can prove exactly how you calculated your profits, and that may include records from prior home purchases and sales. These are documents you'll want to keep forever.
