Tax season is a stressful time for people and accountants alike. It is not uncommon for tax payers to get an overwhelming urge to set fire to all their paperwork then move into the woods and live off the land.
Most of us can resist that temptation, but we still want to do some purging of the seemingly endless piles of documents that accumulate each year. As it turns out, there are some sensible retention rules that will help ‘declutter’ your living space and put some of that ‘tax anxiety energy’ to good use.
Seven Years in Tibet, Six Years of Tax: Keep all Federal and State income tax returns with supporting documents for six years after the filing date. The government can assess additional taxes up to three years after the filing date, but has a full has six years to take action.
Diamonds and Gift Tax Returns are Forever: How long should you hold onto federal tax returns with supporting document that you used as gifts? Like diamonds, forever. They need to be filed with estate tax returns.
Financial Investment Records: Sometimes these are fun to look at and see all the companies that went under (Pets.com, Betamax, Enron, etc.) but it’s important to retain them for several reasons. They provide a date to determine what type of gain--short term versus long term—will be accounted for in gains and losses when the investments are sold. Dividend Reinvestment Plans (DRIPs) require all back up to establish the basis of shares as do returns from capital dividends. Finally, given the preponderance of class action lawsuits, it is wise to retain stock and bond records for up to 10 years.
Partnership and Business. Retain all partnership, member, corporate, organizational, buy/sell or cross purchase agreements for as long as you have an interest in the business. Keep all basis calculations as well.
Personal Records: Marriage license, divorce papers, prenuptial agreements, name changing documents, military discharge papers, birth certificates and similar documents should be kept forever.
Legal Judgments and Loan Satisfactions: Keep forever. Should be easy since there are so few of them.
Retirement Plans: IRA, 401k or other company sponsored or individual account. Keep records of balance, account number, any withdrawals and named beneficiaries. If you converted to a Roth IRA, keep documentation of the tax returns for the years the tax was paid.
Insurance documents: All current policies should be kept in an easy accessible place including life, disability, auto, homeowners, etc. This is particularly crucial if you have long term care insurance. Two years of documentation is probably the right amount.
Art Jewelry and Collectibles: Keep the receipts as long as you own the pieces. If something is sold, keep documentation of the sale with your tax returns for that year (6 years minimum). These are important for audits, loss or if you donate the property and want to claim for tax purposes.
Employment Contracts: Sounds odd but if your firm offered stock options these will be important papers. Keep the contract and any documentation of stock options awarded or purchased. It’s necessary for you or your heirs.
Generally speaking, it’s better to keep something you think might be important than to throw it out. However, there are plenty of documents that you can let go of and thus rediscover whole portions of your attic.
If you have questions or require more information, please contact a Smolin professional at 973-439-7200.