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Trimming the paper trail
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December 30, 1999: 6:25 a.m. ET
How long do you have to keep all that paperwork lying around anyway?
By Staff Writer Alex Frew McMillan
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NEW YORK (CNNfn) - With all the paperwork that comes our way at the end of the year, you might have missed out on a white Christmas and still find yourself snowed under going into January.
Deal with the blizzard of forms now and save yourself having to dig around in the future, particularly at tax time, personal-finance gurus say. Getting records straight also may mean you have a clearer idea of your financial goals and how to go about them, the makings of many a New Year’s resolution.
Now is the season to take care of business, when you’re more likely to have free time around the holidays and at the end of the year. Once you’re geared up, you’re free to take care of a little spring cleaning if you know what you need to keep. Ditching those old statements can save you time and possible confusion in the future.
But how long do you need to keep tax forms? Your W-2s? Credit card and ATM receipts? Financial advisers say many of their customers aren’t sure how to answer those questions.
"The biggest fear people have is, they don’t know what they have to keep,” said Terry Balding, a financial planner who runs Terry Balding & Associates in the Madison suburb of Sun Prairie, Wis. The people he sees run the gamut from pack rats to puritanical receipt pruners, but they all benefit from advice on how to keep proper records, Balding said. "It helps tremendously.”
Ask yourself one question
Balding lets a one-liner serve as his guiding light. "What’s the worst thing that could happen to me if I throw this away?” he asks himself every time he picks up a piece of paper.
It’s tempting to keep everything. But that doesn’t help you sort out your finances at all, and you could fill file cabinet after file cabinet with dross. End result? You and your finances end up more confused.
"Keeping records unnecessarily just bogs you down with lots and lots of paper, and you don’t know what’s important and what’s not important,” said Kyra Morris, a financial planner who runs Morris Financial Concepts in Mount Pleasant, S.C., a Charleston suburb.
Throw a record away if it isn’t important or has outlived its usefulness. Though Balding keeps year-end financial statements, he throws away quarterly investment reports if they reconcile with his records of what he’s bought and sold. "If I throw away a mutual fund statement, what happens? Gee, I can call and get another one. Throw it away,” he advises.
One-year, seven-year and lifetime records
Once you’ve asked yourself that general question, there are three more-specific guides for how you keep records. Most information you can keep for a year or less. Tax-related records you need to keep for seven years. Investment-related records you need to keep for the life of the investment.
For regular household or consumer spending, keep receipts, ATM statements and credit-card receipts only until you have a chance to reconcile them with your monthly bank and credit-card statements. Once the stubs match up with the statement, toss them out, advisers say.
There are two exceptions. The first is for goods and appliances that come under warranty. Because you’re likely to need proof of purchase if you have to make a claim on the warranty, staple the receipt for that new VCR or blender to its instruction manual, recommends Dee Lee, who runs finance workshops for Harvard, Mass.-based Harvard Financial Educators.
Keep all your instruction manuals and warranties in one file, she advises. If you get a new VCR, "throw out the instruction book for the old VCR,” she said.
The second exception applies to tax-related receipts. If you’re planning on claiming a deduction for any credit-card or cash-register purchases, or for any household bills, keep them with your tax records.
You can clean household records regularly
Some people like to keep household bills to compare them with their expenditures last year. Morris says her husband likes to keep electricity bills to show how efficient their house is should they ever want to sell it.
But it’s not necessary to keep utility and household bills longer than a month, if they check out, she and other financial advisers say. If the bill reconciles when your next utility bill comes, you can more than likely chuck the old one. For safety’s sake or piece of mind you may want to keep household bills for a year, to double check whether they apply to any tax deductions. But after that, toss them, personal-finance experts say.
Check stubs, confirmations of regular 401(k) contributions or withdrawals and monthly or quarterly investment statements such as for mutual funds also can be thrown out if they’re not related to a tax deduction. For the interim reports on investments and mutual funds, that’s assuming you get a detailed year-end statement of your positions.
"Generally, at the end of the year, they’ll give you an end of the year statement ... so you’ve got records of the purchase price, sale price of any investments. If they’re all summarized at the end of the year, you don’t need to keep the interim statements,” Bryan Schmitt, an academic associate at the College for Financial Planning, said.
But you need to keep a form -- either the trade confirmation or the year-end summary of trading activity -- that shows the original purchase price for all investments. That way you can establish the "cost basis” for the investment, the purchase price that will be used to calculate capital gains tax.
Also keep records of any dividend reinvestments or subsequent purchases for the life of the investment. Since those investments are made later than the original investment, they will increase the basis on an investment that has gained in value. Likewise you should keep any canceled checks or receipts for work done on property that you own because those expenses count toward the cost basis of the real estate.
Set up a separate file for every investment and account, with a permanent file for any retirement plans and a file for any non-retirement investments, Lee recommends in her book Let’s Talk Money. Do the same for ownership papers on cars and boats. She agrees with Balding. "Keep a separate file on each investment for as long as you own it,” she said.
The seven-year ditch
You need to keep tax records for seven years because there is a six-year statute of limitations on audits assuming there is no fraud involved. Because you file a year after the expenses were incurred, investment advisers say to keep each year in a separate folder, tossing the records for the eighth year when you’ve completed a new tax return.
In fact, there’s a good chance you won’t need the forms that long. If you owe additional tax but the amount is below 25 percent of your gross income, the statute of limitations on filing is only three years. So keeping tax records for four years might well suffice, if your filings are straightforward. But seven is safer, and the statute is six years for amounts over 25 percent of your gross income. There is no statute of limitations when tax fraud is involved or if you file no tax whatsoever, according to the IRS.
Keep as detailed receipts as possible, Balding recommends. For instance, when he was audited, he had mileage log books on all the trips, destinations and distances he had driven for work, filled out every week. An audit is never easy but that type of detail speeds the process. "It’s an interesting situation, quite scary the first time,” he said.
"I literally took this huge box of stuff and said, 'Here it is.' They looked at one or two and said, ‘OK.’ ” You want to be able to inundate the IRS with paperwork to back up every deduction you’ve claimed, he said. "If you can show them proof of what you’ve done, that’s all they want,” he said. If you plan to deduct them, keep any mileage receipts, work-related lunch receipts and so on. Because there’s a cap for medical deductions to kick in, you might want to consider keeping all medical bills and receipts for an entire year to see if you meet it.
The IRS has a guide called Recordkeeping for Individuals, or Publication 552, that is available from the IRS Web site. Click here to go to the page that lets tax filers download Publication 552.
Keep a backup, and get cracking
You can throw out receipts if you don’t need them for your taxes and throw out the supporting documentation after seven even if you did. But you might want to consider keeping a photocopy of all your actual tax returns forever, Schmitt said, for comparison purposes and in case you ever need to refer to it.
It’s fine by the IRS if you keep your records on a computer. If you do scan records in and keep them on a computer file, make sure you have a backup. And make sure you give your spouse and, ideally, a financial adviser of yours any passwords or access codes. It’s not unusual for a person who has stored records on their computer to die or be incapacitated without telling their heirs how to get at the records, financial planners say, which causes immense headaches in salvaging or recreating the data.
Most financial planners like to take the approach of building a steady, organized paper trail. A little planning goes a long way in saving you time. "If they need something, people will spend four hours looking for it,” Lee said. "The reality is, if they spend a few minutes when they’re paying their bills and put things in order so they can find them, they’ll save themselves an immense amount of time.”
Think you’ve left it too late already? There’s no time like the present to get started, according to Schmitt. "Year-end is the time that people think about that kind of stuff. And maybe make a resolution to do a bit better next year,” he said. 
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