Good Recordkeeping

Apr 2015



Most of usrick -2 have finished our 2014 tax returns and my think we don’t have to worry about taxes for another year.  I wish that was the case but unfortunately, it isn’t.  Taxes are 12-month-a-year job and there are things that you and I need to do throughout the year.  It’s not letting the tax tail wag the dog but rather, being smart with taxes.  That being said, some of the things you have to factor in during the year are do you make contributions to a traditional IRA versus a Roth IRA; or traditional 401(k) versus Roth 401(k)?  Are you having enough money withheld so that you don’t get hit with penalties at the end of the year?  In addition, when it comes to your investments are your investments in the right places?  For example, if you are buying a tax-free bond you wouldn’t want it in your IRA or, if an investment you are buying produces ordinary income, it would be better in a retirement account versus an investment that will produce capital gains.  The bottom line is that you have to take taxes into consideration throughout the year.


Another thing that you should consider doing is pruning your tax files.  I know people that have saved their tax information for 40 years.  As far as I’m concerned, there’s no reason to save information for that long.  All it does is create clutter.


In that regard, the question is how long do you need to save tax records? The general rule is that the IRS can audit you three years after you have filed your return.  Therefore, for most people their audit window is 2011 and on; consequently, their records should be kept intact.  Anything before those years, the risk of audit is slim.  The IRS can audit you for more than three years if they determine that there is fraud involved.  Therefore, for the great majority of people, the only tax records they need to retain is the last three years.  Some people want to be extra safe and in those situations I will tell people to save their returns for up to seven years; however, realistically there is no reason to save returns for longer periods of time.  Therefore, if you still have your tax information from the 1980s and 90s, it is certainly safe to say that you can dispose of them.  There are certain exceptions and the one that would apply to most people is information regarding your personal residence.


When they sell their homes, the great majority of people will be excluded from taxes.  If you lived in your house for three out of the last five years, a single person can exclude $250,000 in gain and a married couple $500,000.  Therefore, when it comes to selling their homes, most people will not have a taxable gain.  However, it is possible that you either have a large gain or don’t meet three out of the five-year requirement and therefore, documentation as to improvements that you have made to your house can be helpful.  Therefore, if you do major improvements in your home, I would save that documentation until the home is sold.


At the same time you’re cleaning out your tax records, why not clean your other files.  I can’t think of any reason why you need to save a utility bill or a cable bill for years.  Typically, on bills such as those, as soon as I receive the next month’s bill I shred the old bill.


In the past, we were told to save everything.  Today, that is not necessary.  After all, people who save everything may not be able to locate something they need.  As far as I’m concerned, part of good personal financial planning is good recordkeeping and when it comes to good recordkeeping, sometimes less is more.  Therefore, before the weather gets nice, why not spend some time going through all your files and rid yourself of the clutter.  In that regard, remember, one of the best tools you can have these days is a shredder.  Therefore, when you dispose of your old records make sure you shred them.


Good luck!