Financial Planning

Financial Spring Cleaning

Are you a hoarder? Did you just put that Pepco bill away last month and see that the one all the way in the back was from 1992?  Spring is right around the corner. It’s the time of year when we seem to find extra time to clean our houses. Sure, the carpets need cleaning, and the sun needs to shine through clear windows, but what how about those bank statements and tax documents that we’ve been storing for the last 20 years? Perhaps it’s the time to tackle those, unclutter the drawers and recycle some paper, too!

Most of the time I find that people keep things because they just don’t know that they don’t have to. “Better safe than sorry,” the saying goes. So, here’s a helpful guide for what you don’t have to keep and what you should keep.

Any documents that were used in preparation of your tax return should be kept for three years after the due date of your tax return. This includes obvious items like W-2s and 1099s, as well as any supporting documentation for a deduction you may have taken or income you have reported: if you made a donation, keep the receipt from the charity; if you deducted utility bills on your home office, keep copies. Credit card statements, mileage logs, canceled checks, and bank statements, too. This might seem like everything, but after three years, as long as you’re comfortable you didn’t file anything fraudulently, you do not have to keep those items any longer because the statute of limitations for any audit will have run out.

Exceptions apply, as always. If you did underreport your income, but then you fix the items, you’ll want to hold onto your records for six years, not three. And if you intentionally misrepresented something, there’s no reason to keep reading, just hold onto everything.

If you own rental properties, hold on to documentation for as long as the property remains a rental, plus the three years after you’ve sold or exchanged the property. And you’ll certainly want to keep copies of bills that have increased your basis in the property throughout the years. It’s much better than just trying to remember how much that pool in the backyard actually cost fifteen years down the road.

Another exception to the three-year rule is payroll records. Any person or business that has employees must keep their payroll records for seven years. Though the IRS only requires them to be held for four years, some states require an even longer period, so seven is a good rule of thumb to play it safe.

As for copies of your tax returns, you are expected to keep copies indefinitely. Obviously, most people don’t. For example, I know I can’t find mine from that job at the lemonade stand in 1985. But as long I know it was filed, I’m not really worried about anyone asking me for a copy. To err on the side of caution, the great thing about technology now versus 1985 is that it’s easy to scan files. It’s a good idea to start keeping digital copies moving forward if haven’t been doing so already.

So, when you’re cleaning the carpets and cleaning the windows over the next few weeks, perhaps you start shredding your AOL and Bell Atlantic bills from many years ago, as well. Who knows, maybe it will help you get that “spring clean feeling” both mentally and physically.

Andy Cooper, CPA is a principal of Lobel, Cooper & Associates, P.C. in North Bethesda, Maryland.