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Answer:
Dear Mr./Ms. Davis,
Well, it pays to be a pack rat -- but you don't need to turn into the Collyer brothers (their story appears at the end of this column). However, tossing out papers you need not only could cost you money, but also certainly will eat up hours of time as you try to replace the lost information.
Although I'm not by nature overly conservative, I am in this area -- because I know how demanding and unforgiving the IRS can be. You should be extra cautious, too.
Tax Returns
The IRS has 3 years from your filing date to audit your return if it suspects a "good faith" error. The 3 year deadline also applies if YOU discover a mistake in your return and decide to file an amended return to claim a refund.
It has 6 years to challenge your return if it thinks you under-reported your gross income by 25% or more.
It can come after you forever if you failed to file a return or filed a fraudulent one.
State tax rules vary, so check with a local accountant.
Canceled Checks
Keep those relating to your taxes for 6 years. These include mortgage payments, business expenses, charitable contributions, child care, medical expenses, professional dues, retirement plan contributions and, if you're the one paying, alimony.
Brokerage Statements
Keep records of stock and bond purchases as well as the actual certificates until you sell them. You need to prove whether you have a capital gain or loss when you file your tax return.
$TIP: If you are keeping stock and bond certificates in your safe deposit box, rather than leaving them here with BUYandHOLD "in street name," photocopy each one and store copies in a location separate from the originals.
Mutual Funds
As with stocks and bonds, you must pay taxes on any price appreciation when you sell fund shares. Therefore, when you buy shares of a mutual fund, keep the confirmation slip indicating the number of shares you bought and what you paid for them.
$TIP: If you decide to sell only some of your shares, your records will help you decide which ones to unload. The IRS assumes that you are selling the first shares you purchased -- unless you specify to the contrary. This is called first in, first out (FIFO) and can be unnecessarily costly if you have regularly purchased in a fund that has continually increased in value.
Real Estate Information
If you own a house, condo or co-op, keep all records showing the purchase price and the cost of permanent improvements (new roof, electrical wiring, an addition, installation of air-conditioning, major remodeling). Also keep records of expenses related to buying and/or selling property, such as legal fees, property searches, advertising, appraisals -- for 6 years after you sell your property.
Paycheck Stubs
Keep these until you receive your annual W-2 Form from your employer. Make certain the dollar amounts agree. If it doesn't, ask for a corrected form, known as a W-2C. You should also save your final paycheck of the year -- it records deductions for pension contributions, deductible medical insurance premiums, charitable contributions and union dues, all of which have tax implications.
Credit Card Stuff
Keep original receipts until you receive your monthly statement. Then you can toss them if there are no errors. Keep monthly statements for six years if anything is tax-related, including business expenses. If your credit card gives you buyer protection or has an extended warranty plan, keep until these perks expire.
If you have charged big ticket items, such as jewelry, antiques, rugs, collectibles, furniture, computers and printers, appliances, motorcycles, etc., the individual bill or the specific credit card statement for that charge should be kept to use as proof of their value if they are stolen, lost or damaged.
Matured Bank CDs
Save until January of the year after they've matured. That's when you get a form from the bank indicating how much interest you have earned.
Retirement Plan Data
Keep quarterly 401(k) or 403(b) and pension plan statements until the end of the year. If everything matches, keep only the annual statements. I recommend that you keep those until you retire or close your account.
$TIP: If you made a nondeductible contribution to an IRA, keep records forever because when you start to withdraw money, you will need to prove that you've already paid taxes on these contributions. (You need to file Form #8606 if you made a nondeductible IRA contribution.)
MORE INFORMATION
IRS Publication #552, "Recordkeeping for Individuals," is available at: www.irs.gov.
TRIVIA CORNER: The Collyer Brothers...
Homer and Langley were born in the 1880s and spent their adult years living in the family's three-story brownstone in the Harlem section of New York. These eccentric recluses rarely ventured out, although after midnight, Langley was seen running errands and collecting items found on the street. He also devoted much of his life to taking care of the sickly and blind Homer. Distrustful of doctors, Langley devised odd cures for Homer, including a diet consisting of 100 oranges a week and black bread with peanut butter.
On March 21, 1947, the 122nd Street Police Station received a call from a man who said there was a dead body inside the once fashionable but now decaying house. When patrolman William Barker entered the second floor bedroom, he found it filled from floor to ceiling with objects of every shape, size and kind. It took him several hours just to cross the room to reach the decaying body of Homer.
Police then spent three weeks going through the 136 tons of junk in the house and in the process they found Langley's body. The brothers had saved 14 grand pianos, two organs, the chassis of a Model-T Ford, six U.S. flags and one Union Jack, a primitive X-Ray machine and hundreds of human medical specimens preserved in glass jars. They also had 34 bank deposit books with the balance totaling $3,007.18.
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