What financial records should be kept and for how long?

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Financial record keeping tips

Since many of us handle large amounts of paper during tax time, it begs the question, “What financial records should be kept, for how long and what can be discarded?” The answer to those questions has changed over the years, so we thought it would be helpful to outline some basics. First, we believe it is easiest and most convenient to keep records in digital files on your computer, provided you have a scanner, a good system for organizing the documents, and a backup mechanism and security measures in place on your computer.

Below are more tips for record keeping of frequently encountered documents.

Tax Returns: The standard rule from the Internal Revenue Service (IRS) is to keep tax returns and supporting documents for three years after you file. Unfortunately, as is the case with many tax issues, it isn’t quite that simple. For instance, the IRS website page for small business owners titled “How long should I keep records?” gives the strange instruction, “Keep records indefinitely if you file a fraudulent return.” Huh? It is hard to envision a fraudster keeping records of their crime forever!

What the IRS was probably trying to convey is that to defend an audit, you need records. Even though the standard rule is three years, the IRS can audit returns as old as six years if they believe income was underreported by 25% or more, or up to seven years if they believe you were in error. They have no time limit to audit suspected fraudulent returns.

There is good news on the record keeping front for taxpayers using the new expanded standard deduction. Since these filers will not be itemizing deductions, there is less of a need to keep records of expenses which previously would have appeared on Schedule A like medical expenses, mortgage interest, and charitable deductions (see IRS Publication 526 for details on charitable donation records). Receipts for these items should be kept during the year, but once it is determined the standard deduction will be used, there is usually no need to keep them after the return is filed. The IRS allows for both scanned copies of receipts and credit card statements of these expenditures.

Other tax records: Three forms of tax records we often find missing or overlooked are records of cost basis, home improvements, and past IRA transactions.

  • Cost basis: Reporting has gotten a little easier thanks to regulations which went into effect for most transactions in 2011. Brokerage firms are now required to track cost basis for “covered securities.” To learn more about what is covered and when it became covered as well as the basics of tax planning we use regarding them, click on our post, “Navigating the new tax reporting requirement.” Your gain or loss on a sale of an asset not owned in a retirement account is calculated based on the difference between the net sales proceeds and the cost basis. The higher the basis, the lower your taxes. When securities are sold, records of the cost basis should be kept until you are no longer subject to a possible audit. In addition, you should keep a record of the cost basis of any inherited assets or assets gifted to you. Generally, the calculation for cost basis for inherited assets starts with the value at the date of death of the benefactor. The calculation for a gifted asset starts with the original purchase price.
  • Home improvements: Cost basis is also important when selling a home. If you sell your home for a big enough profit, you may pay taxes on your gain. (See “How is the sale of a house taxed?”) Expenses to improve (not maintain) your home can be added to your cost basis, thus reducing the gain and the potential tax. Be sure to keep all home improvement receipts.
  • IRA transactions: For IRAs, not all taxpayers can deduct their contributions. When a non-deductible contribution is made, it is made with already-taxed funds. Financial institutions do NOT track these contributions. If you don’t keep track of these contributions, you will pay taxes again when the funds are withdrawn. It is also your responsibility to track the amounts of conversions to Roth IRAs. Both conversions and non-deductible contributions are accounted for on Form 8606. This form is only attached to returns for years in which there was relevant activity. Therefore, you should always keep a copy of the most recently filed 8606, even if you would otherwise dispose of that year’s return.

Investment, banking, credit card and other frequent statements: In many cases, these institutions provide an annual statement (often the December statement) recapping the entire year.  Once you receive the annual recap, retention of the monthly statements is usually not necessary. When an institution does not provide an annual recap, you need only keep monthly statements that contain transactions of importance such as a charitable donation, business expense, or loan payoff.

The custodians we use offer digital copies of statements, confirms and notices and archive your documents for 10 years. Most banks and credit unions also offer electronic statements instead of paper, thereby eliminating the need to scan and save statements.

Loans, insurance, and estate planning documents: Generally, it is wise to keep copies of loan agreements until the debt is retired. Once paid off, we think it is wise to keep a record of the payoff confirmation and any releases associated with the debt indefinitely.

For all types of insurance, keep active policies and statements in a safe and accessible place. For insurance policies that renew annually (homeowners, auto), in the absence of a claim, there is no need to keep documents related to an expired policy.

Estate planning documents such as a will, trust, power of attorney, health care surrogate, living will, and related documents showing beneficiary designations for insurance policies and retirement accounts should be kept safe and accessible. You may want to provide a trusted loved one with copies or let them know where these documents are located.

How we can help: Our record retention allows clients to get documentation of all transactions in all accounts we manage as well as copies of statements, tax forms, and other documents from Schwab and TD Ameritrade. We will help research or otherwise establish cost basis on securities not covered under the brokerage rules. We securely store copies of any other documents given to us relevant to our work as financial planners, such as tax returns and estate planning documents.

Tax law is clear: ultimately, you are responsible for record retention. But our firm can be of great assistance in making sure you don’t miss anything, even when something goes missing.


News & Notes

Welcome, Clareese: If you have visited our Orlando office recently, the warm smile that welcomed you came from Clareese Chin, our newest Client Service Manager. Clareese graduated with honors from Rollins College in 2014 and has a background in customer service and client management.

When asked how she found her experience working here thus far, she replied, “The environment here [at Moisand Fitzgerald Tamayo] is unlike anywhere else. I’ve never worked at a place that is so client-focused and that strives to constantly improve their services. It’s a real joy to work here!”

Dan Moisand fee-only financial planner advisorMFT named to “Seminole 100”:  Last summer we were named to the Inc5000 for being one of the fastest-growing privately held businesses in America. Our firm also qualified for the inaugural Seminole 100, a program run by the Jim Moran Institute for Global Entrepreneurship at FSU’s College of Business, which recognizes the 100 fastest-growing privately held businesses owned or co-owned by a graduate of Florida State University. FSU alum Dan Moisand accepted on behalf of the firm at a banquet in March.

It is encouraging to be recognized for a strong growth rate because our “marketing” is almost purely word of mouth. This listing validates our long-held belief that the best way to build the firm is to do great work for our existing clients. As personal finances get ever more complex, our ability to simplify and coordinate a clients’ financial affairs becomes increasingly important and valuable.

 Contact Us

Moisand Fitzgerald Tamayo, LLC is an Orlando, Tampa and Melbourne, Florida based fee-only financial planner serving central Florida and clients across the country. Moisand Fitzgerald Tamayo, LLC specializes in providing objective financial planning, retirement planning, and investment management to help clients build, manage, grow, and protect their assets through all phases of one’s life and the many transitions in between. If you have any questions or would like to discuss anything further, please give us a call or send us a note. If you are not a client and wish to receive emails notifying you of new posts – no more than once per month – fill out the subscription information in the sidebar to the right. For more frequent updates, follow us on FacebookLinkedIn, or Twitter.  

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About Dan Moisand

Dan Moisand is a fee-only financial advisor with Moisand Fitzgerald Tamayo, LLC. He is a regular contributor for multiple outlets, including Florida Today, MarketWatch, and The Wall Street Journal. His writing and financial advice have also been featured in Financial Planning, Investment Advisor, Wealth Manager/Advising Boomers, Forbes, Smart Money, and The New York Times, among other publications. He is the only two-time winner of the Journal of Financial Planning’s “Call for Papers” competition and has been named a top financial planner and advisor by multiple publications. Investment News named Dan one of the “twenty most influential men and women” in the history of financial planning. He currently serves on the Board of Directors for the CFP (Certified Financial Planner) Board.


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