I've decided that my New Year's resolution will be to get rid of a lot of old papers and keep myself more organized. With that in mind, I'm wondering what financial records I need to keep and which ones I can throw away?
Now that you're starting to receive year-end statements, you
can actually toss a lot of the papers that are filling up your file
cabinets. And it's a great time to get a head start on gathering your tax
paperwork, too. Here's what you can get rid of and what
you'll need to track down:
Bank records. Toss ATM receipts after your bank statement arrives and
you've made sure everything matches up. You can toss old cancelled checks too, unless you need them for tax purposes.
Thanks to Check 21, the new check-processing law that took effect October 28, you won't have to worry about cancelled checks in 2005. You probably stopped receiving cancelled checks with your statements a couple of months ago. Not to worry, though, if you need a copy of a check for tax purposes -- such
as to document a charitable contribution or business expense -- you should be able to download it from your bank's Web site. If you electronically paid the expenses, your bank statement showing who the money was transferred to can count for tax purposes.
Tax records. It's a good idea to keep your income tax returns forever, but you can generally toss supporting documents after three years -- you're usually safe from being audited after that time unless you
forgot to report a big chunk of your income. If you have self-employment income, keep the records for at least six years.
Investments. Keep records showing what you originally paid for mutual funds and stocks until you sell them and report the gain or loss on your taxes. Also hold onto your year-end statements showing how much you received in dividends or capital-gains distributions during the year, so you won't end up paying taxes on them twice. You can toss your monthly statements if everything matches up with your year-end report.
Home-improvement records. Since most homeowners can now keep their
home-sale profits tax-free, they don't generally think to keep
home-improvement records anymore. But it's still a good idea to hold onto receipts if you're a new homeowner. If you're forced to sell before living in the home for two years, you could be stuck paying capital gains taxes on some of your profits. It's also a good idea to keep your home improvement records if you plan to convert your home to rental, or if you and your spouse are selling in a hot real estate market and will pocket more than $500,000 ($250,000 if single).
The cost of improvements to your home (not just regular repairs) can be added to its purchase price and boost your basis, the number that's subtracted from the sale price to figure your capital gain. The larger your basis, the less you would owe in taxes. The information can also help document the work you've put into the house when you sell it.
Credit card statements. Throw them away as soon as your payment is posted on the next month's bill, unless you need to keep them for your tax records.
Utility receipts. Toss them as soon as the next month's statement shows that you paid the bill, unless you're deducting them as a home-office expense.
GETTING STARTED
