Good order is the foundation of all good things.
- Edmund Burke, 18th-century British Statesman and orator
Even on a rainy day at home, you may not feel like putting some order into your personal records. It's not a chore that many people enjoy. But come next April, orderly records will make life a lot easier for you -- and your tax preparer.
Besides saving you substantial time and frustration spent looking for canceled checks, receipts, and other documents needed to prepare your tax return, there are other reasons to do something about that clutter. For example, you may suddenly need to find a warranty for a major appliance that has gone on the blink. Or you may need a birth certificate to obtain a passport. Or the time may come when you want to sell your house and you need documentation of major improvements, such as a screen porch that you added, which could lower your capital gain.
If you've ever spent hours searching for a document you just had to put your hands on, you'll probably agree that the effort it takes to get organized is small compared with the peace of mind it will yield. But a word of caution is in order: don't become overly zealous when the urge to clean strikes. Take time to carefully sort through your household papers before discarding any information, lest you throw out the useful with the useless. Knowing which is which and how long to keep certain records, is the first step toward putting your financial house in order.
At a minimum, you should hold on to copies of bills that support income and expenses for three years after the due date of each tax return. Included in that category are such documents as W-2s showing salaries and tax deductions, K-1 partnership returns, and 1099s showing dividends and interest. You also should save canceled checks in case the Internal Revenue Service questions your deductions for charitable contributions.
It's no secret that the IRS audits only a tiny fraction of the millions of returns filed each year. And the IRS normally doesn't audit returns more than three years old. However, if the government suspects that there is a "substantial understatement of tax liability" -- more than 25 percent -- the IRS can extend the time for an audit up to six years. And there is no time limit if the IRS suspects fraud or when no return has been filed at all. What better reason to keep tidy and accurate records? Without supporting papers, you may have a hard time proving your case -- and any deductions you can't document may be disallowed.
Some documents you should never throw in the trash. For example, you should keep copies of brokerage statements and mutual fund transactions virtually forever. They will enable you to determine the basis, or cost, when you sell securities or redeem mutual fund shares. It could be to your advantage to be able to identify which shares you sold and which shares of a particular security you bought at different times. If you lack the data to back you up, the IRS will take a first-in, first-out approach.
Hold on to any records you may need to support the cost of other investments or assets. If you contributed to an Individual Retirement Account or a Keogh plan, save the statements until all the funds have been withdrawn.
Taxes aside, certain personal records, such as birth and marriage certificates, should be kept indefinitely, and they're best kept in a bank vault. Other documents that fall into this category are trust agreements, your power of attorney, and pictures of valuables, such as your silverware and fine paintings, which you would need for insurance purposes in the event of a fire or other loss.
The one document that decidedly does not belong in your safe deposit box is your will. Keep it in a safe place, such as a fire-retardant strong box, and leave a copy with your lawyer or a trusted friend. Putting a will in a bank can cause problems if you live in a state where safe deposit boxes are automatically sealed when the owner dies.
David Keator holds his series 7, 63 and 65 securities registrations, and is licensed to sell insurance and variable annuities. He currently serves on Wachovia Securities Client Strategy Group Advisory Council. In addition to his duties with the Keator Group, David is a frequent guest of the lecture circuit, offering estate and financial planning seminars to the Federal Reserve Bank and Fortune 100 companies as well as at the Las Vegas Institute for Advanced Dental Studies
Wachovia Securities does not render legal, accounting or tax advice. Please consult your CPA or attorney on such matters. The accuracy and completeness of this material are not guaranteed. The opinions expressed are those of the author(s) and are not necessarily those of Wachovia Securities or its affiliates. The material is distributed solely for information purposes and is not a solicitation of an offer to buy any security or instrument or to participate in any trading strategy. Provided by courtesy of David Keator, a Partner with Keator Group, LLC in Pittsfield, MA. For more information, please call The Keator Group at 800-338-5209. Investment products and services are offered through Wachovia Securities Financial Network, LLC (WSFN), member NASD and SIPC, a registered broker-dealer and separate nonbank affiliate of Wachovia Corporation. Keator Group, LLC is a separate entity from WSFN. ©2005 Wachovia Securities, LLC. Investments in securities and insurance products: NOT FDIC-INSURED/NOT BANK-GUARANTEED/MAY LOSE VALUE
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