By CHUCK JAFFE
Finishing your taxes typically is more of a relief than a feel-good moment, but turning on your shredder can brighten your mood even more.
You'll also need an idea of which papers you should keep and which ones you can toss.
Call it a financial spring-cleaning or just the basic urge to tear something up and throw it around, but one of the best ways to celebrate the end of tax season is to take out your frustrations on the unnecessary documents cluttering the filing cabinet, or piled up in boxes and corners of the house.
Truthfully, most people are afraid to toss financial documents, unable to separate the necessary and meaningful documents from the outdated and frivolous ones. That is even more true right now, as the rules are in the middle of a three-year changeover process that has investors concerned about what records they must maintain.
Speaking personally, having been through an Internal Revenue Service audit last year, I've even had to do a double-take on the rules. Read about my audit experience here.
Recently, my wife Susan -- the most patient and understanding woman in America -- saw a note from the IRS confirming that everything was settled and the matter was now closed; we had assumed that was true months ago, since we agreed to the agency's adjustment and paid all outstanding amounts, but this was official notice. Susan's comment: "I suppose we have to keep this somewhere too, now, don't we?" (Nope; it's a notice, not a tax record.)
With a particular eye toward the new rules on investment information, here are some guidelines for various financial statements.
Sell a security held in a taxable account and you'll need to tell Uncle Sam what you paid for it, or at least come up with a good-faith estimate of the price you paid. That way, you can calculate your profit or loss.
That's why investors have always been told to keep documents that establish their cost.
This is also where the rules have changed. In 2011, brokerage houses had to start providing cost information on stock purchases for customers; that applies to mutual funds beginning this year, and expands to options, bonds and other securities in 2013.
That does not mean investors can empty the files of old trading confirmations. The financial-services firms must establish and maintain records about investment costs purchased beginning the year the rules went into effect (so last year for stocks, this year for funds, etc.). While many firms are providing cost records for purchases made prior to the rules, some aren't; some firms will work with consumers to build records from the past, so that their accounting reflects the papers you have saved, at which point the firm's numbers would be considered reliable.
Until you are sure the investment firm has records of old transactions -- it would never have had cost information for securities you transferred into the account, and it might have ditched the purchase records of some stock you bought-and-held for decades -- don't get rid of the confirmations.
Still, most people have more investment papers than they need. A rule of thumb for mutual-fund and brokerage statements is to see if the final statement for the year shows all transactions for the year; if it does, shred all monthly statements except that year-ender. Having a bunch of statements covering the same ground just becomes a hassle if you ever have to sort your paperwork for an audit.
Most people take one of two extremes with tax paperwork, either thinking they must retain all tax documents for life, or that they can toss everything once they pay what's due or cash a refund check.
The truth lies in the middle.
Assuming you are not filing fraudulent returns -- for which there is no statute of limitations -- your income tax return can be reduced into several different stacks of paperwork, each with its own rules. (Remember, too, that most tax preparers and accountants keep copies of your documents for the life of your advisory relationship, so there may be a backup of older returns even if you shred your paper copies.)
Start with the return itself, typically the one document clogging people's files. Old tax returns -- especially those covering the purchase or sale of property -- can be important for compiling future returns, possibly decades into the future. If you want to be safe and keep returns in perpetuity, fine; just clear out the things that make the file so thick each year.
All of the information that helps determine what you owe -- the support and back-up documents from receipts and canceled checks to bills and tax forms -- must be kept for three years after the return was due. Thus, when you stick this year's return in the filing cabinet, you can purge the bulging pile of stuff from the 2008 return (which you filed in 2009, so the three-year holding period is ending now). If you have bulging files from prior years, prune them too.
Before burning those older tax documents, pull out anything related to home improvements and any records covering dividends or capital gains that weren't part of year-end investment statements. Those documents may come in handy for calculating profit or loss when you sell the home or investment.
Staying ultracautious with your shredding, you will want to keep forms related to income (1099s and W-2 forms, for example) for six years, the length of time the IRS has to challenge returns on which it believes gross income was underreported by 25% or more.
It really doesn't matter that you paid for lunch or gas or some item of clothing with your credit card in 1997, or last month for that matter. Credit-card statements, utility bills, department-store and service-station charge-card bills should be kept long enough to verify the information and make sure payments have been properly credited.
There are some exceptions, of course.
If your bills cover tax-deductible expenses, they become a tax document. If you have an office at home and deduct your utilities, the electric bill becomes back-up tax paperwork and falls under that rule (meaning it must be kept for three years after the tax return is filed).
In divorce cases, records may be important in determining who pays the child's expenses and can claim the child as a dependent on a tax return.
Because home-improvement expenses have tax implications, if you used a credit card to pay for home improvements, keep that record but sort it into a file so that all of your home-improvement bills are handy come that future day when you sell the house.
You also should retain any bill on which there were disputed charges, fraudulent card use or other problems. Keeping those bills -- along with notes on how and when you resolved the issues or got extraneous fees or charges waived -- could come in handy if the negative information shows up on your credit report. Purging your files of the ordinary, no-reason-to-keep-it paperwork makes it much easier to find those items if there is ever a need; you don't want to have a mountain of bills to sift through while your credit record is somehow at stake.
Likewise, consumers who use a credit-card issuer's buyer-protection program should keep the bill for as long as the product is protected. Staple the receipts for your protected big-ticket items to the monthly statement they appeared on, creating a record of where something was purchased, what it cost and how it was paid for; if the item is lost or stolen, the receipt/bill combination is a clear proof of purchase.
If you got everything you were entitled to and have no dispute with your employer, dump the paycheck stubs.
Use the last stub of the year to cross-check your employer's tax reporting, get the value of any donations you make through your paycheck and, depending on circumstances, have a record of the amount of money you paid out for health-care coverage. Armed with that information, you can shred the year-end stub, too (though many people prefer to keep it, simply to document their year's efforts).
Bank statements, canceled checks, ATM slips
Most people don't get old checks back anymore, but may get an image on a bank statement. No matter what you're bank does, there is absolutely no reason to hold on to old checks from, say, a trip to the grocery store, or a bank statement from five or 15 years ago.
If you save bank statements figuring you will someday balance the checkbook, but haven't made that effort in years, give yourself a reality check; you're not suddenly going back to find an error in your account from 2009 or, worse, 1999.
Clip any check images that have tax ramifications -- charitable contributions, mortgage or tax payments, home improvements and the alike -- but once you have mined that information (and balanced your checkbook or simply accepted what the bank has said about your account) those statements, check copies and ATM slips can go.