Recently, my wife and I were putting away our holiday decorations. As I followed her to the attic (via the office) with a large box of nutcracker figures (thanks mom), we both looked around and she said, “We really need to organize this office.” It was as if she was reading my mind.
This time of year, as resolutions are made (and broken), and documents are gathered for income tax preparation, many people have the same thought. I receive a lot of questions regarding how long one should keep personal financial records, especially from those preparing to downsize their homes. While the only “rules” are related to documents the IRS requires you to keep to support income tax records, there are recommended holding periods for other documents.
Generally, anything related to calculating income tax should be maintained for a minimum of three years, but often no more than seven years. This includes all business-related items that are written off for tax purposes on your personal income tax return. For those who keep electronic records, the guidelines remain the same.
There are some types of documents that should never be discarded, including birth certificates, adoption paperwork, education records, professional license records, military records, marriage licenses, divorce decrees, and death certificates.
Here is a listing of different types of personal records and the recommending holding period for each.
Income tax returns and supporting documentation. The general rule is seven years. The IRS has three years to audit a tax return with the following exception: underreported income greater than 25% has a six-year statute of limitations. Fraud, however, does not have a time limit. Supporting documentation includes W-2 support, 1099 statements, purchase and sale confirmations for investments sold outside of retirement accounts, and acknowledgment letters from charities.
Bank statements. Now that most people have access to statements online, there is no reason to maintain monthly bank statements. However, if you are planning to apply for a mortgage or other type of loan, we recommend maintaining three months of statements in paper format. Should you require statements that cannot be obtained online, banks will furnish copies, upon request.
ATM receipts. After balancing your checkbook, shred receipts.
Canceled checks. Shred canceled checks once your checkbook is balanced, unless they are needed to support an income tax deduction (then keep for seven years).
Credit card and sales receipts. Keep until a statement is received and reviewed. You may also want to keep these until the warranty expires, or you can no longer return the item. Remember though, you must maintain receipts for seven years if you are deducting the items on your tax return.
Credit card statements. Maintain for three months.
Pay stubs. If year-to-date information is reflected on the most recent pay stub, the individual statements from throughout the year are not needed. Save the most recent pay stub until your checkbook is balanced. If, however, no year-to-date information is available on your pay stub, you should keep all pay stubs until a W-2 is received. Note that three to six months of history may be requested if you are applying for a mortgage.
Medical bills and insurance. Premium statements, doctor’s bills, prescriptions, and hospital bills should be kept for five years unless they are needed to support an income tax deduction (then keep for seven years).
Canceled insurance policies. Keep for three years after cancelation.
Property and Casualty policies (home, renter, auto, umbrella policies). Keep insurance records for five years or until the asset is sold, whichever is less.
Satisfied loans. Maintain for seven years.
Purchase price of home and documentation of capital improvements. Maintain until the home is sold unless you need to support an income tax deduction (then keep for seven years).
Mortgage documents. Maintain for as long as the mortgage is open. Once paid off, maintain for seven years.
Utility bills. Keep bills for three months, unless you need to support an income tax deduction (then keep for seven years).
Warranty documents. Keep for as long as you own the product.
Investment documents. Capital gains and 1099 Forms should be maintained for seven years with the corresponding tax return. Confirmations of trade-in non-retirement accounts should be maintained until the asset is sold, and then included in the support for the tax return and held for an additional seven years.
Auto records. Maintain for as long as you own the car unless you need to support an income tax deduction, in which case records should be maintained for seven years.
Accident reports and claims. Maintain for seven years.
Charitable contributions. Maintain receipts and acknowledgment letters for seven years with the applicable income tax return.
Wills, Trusts, Powers of Attorney, Advance Medical Directives. Maintain permanently or until they are replaced with updated versions.
When it is time to discard any of the documents above, protect yourself from fraud and identity theft by shredding everything that contains personal information, such as your social security number, address, birth date, and account numbers. If you bring your documents to a large shredding facility or a sponsored shred day from your town, ask what safeguards they have in place to protect the information, or ask them to place everything into the shredder so you can witness the destruction. EKS offers clients the ability to drop into the office and place sensitive documents requiring shredding into our locked shred box. Call us if we can help.