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Ancient Tax Documents Are Best Stored in the Round File

March 21, 1997|CHARLES A. JAFFE | Charles A. Jaffe is personal finance columnist at the Boston Globe. He can be reached by e-mail at jaffe@globe .com or at the Boston Globe, Box 2378, Boston, MA 02107-2378

On the list of things most of us hate to do, taxes are followed closely by spring cleaning. And that's exactly the order in which those two chores should be handled at this time of year.

If you are like most people, you are drowning in financial paperwork--check stubs, old bills, canceled checks, credit card statements, investment paperwork, retirement plan updates, ordinary receipts and whatnot.

Many people see this stuff as their personal financial history, others figure they will need it someday. For many, the documentation is some sort of security blanket, as if the ability to show every paid receipt over the years validates their life.

Most of this stuff winds up as mildew fertilizer or slowly breaks down into dust, keeping your vacuum cleaner busy for years.

Experts say that financial clutter is best eliminated around the time you are preparing your taxes, when record keeping is on your mind and the files for the current year are either empty or slim. Eliminating aged or worthless financial documents, therefore, makes it easier to sort out your finances.

There are two basic rules for old financial documents.

If the account is active, rip up the paperwork so that the account numbers are unrecognizable. A shredder is handy, but not necessary.

If the account is no longer active, just keep a record of the account numbers and the dates the accounts were closed. Throw out everything else from closed accounts.

Most credit checks cover seven years. Older information sometimes resurfaces unexpectedly, but you probably won't need old records to sort that out. Tax audits don't go beyond five years unless fraud is involved--in which case you might not want to have records anyway.

With those warnings out of the way, here are some specifics:

* Tax returns: Taxes set the tone for what you should keep. Says Lisa Kanarek, who runs Dallas-based Everything's Organized: "Make sure you have everything you need in case of an audit. Almost everything else can be thrown out."

The Internal Revenue Service can audit you for three years from the date a return is filed, can pursue underreported income for six years and can chase false or fraudulent returns forever.

That seems to imply that you should keep deduction receipts three years and your copy of W-2s for six years. But accountants tend to suggest you keep things longer--after all, the dust isn't collecting in their house.

As for the actual tax returns, most advisors suggest letting that be the one thing you always keep.

* Paycheck stubs: Assuming you receive everything you are entitled to and have no dispute with your employer, dump them. Use the last stub of the year to cross-check your employer's tax reporting; after that, it too can get tossed.

"You might want to hang on to the most recent one until the next one arrives," says Trudy M. Phillips, who heads the firm File Management Inc. in Leeds, Ala.

It can also be handy to compare how much was deducted from your paycheck for a particular purpose earlier in the year, so you might want to save a few random stubs for reference.

* Consumer bills: Keep credit card statements, utility bills, department store and service-station charges and the like long enough to verify the information and make sure your payments have been properly credited. Unless you need them for taxes, they have no use.

But in divorce cases, expense records may be important in determining who paid the child's expenses.

* Bank statements, checks, ATM slips: Checks are records for deductions and proof of payment, but these days most people let their banks save them on microfilm and only get them if needed. (Keep check registers for several years, in case you need to ask for an old check.) Receipts--or even your check register--are usually sufficient for a tax audit or other purposes.

* Investment records: People overdo this. Check your statements against your annual year-end statements, then just keep one statement per year.

Keep any document that pertains to the purchase or the sale of a security; it will become tax paperwork in time.

* Insurance papers: Old policies fill files for no reason; typically, they are thick documents that became invalid when the new policy or statement arrived. Keep current copies only.

* Home expenses: If you make improvements to your home, plan to keep the paperwork until you sell it, when it will come in handy for tax reasons.

* Warranties: Keep warranty information for as long as it is in effect.

* Store receipts: You should hang on to sales slips from goods that can be returned or that come with lifetime warranties.

Organizational experts suggest clipping those receipts to warranty paperwork, and then periodically emptying your warranty file for those goods you no longer own.

If you aren't concerned about returning the good or getting a tax deduction from it, toss the receipt.

* Correspondence: If it pertains to your taxes, your credit history or some form of ongoing dispute, keep it on file. Otherwise, most business correspondence is ready for the recycling bin within a year of when it was written.

"We all get a lot more paperwork than we need, and most of us keep far too much of it," says Belmont, Mass., financial advisor Sharon Rich, who teaches an adult education course on financial record keeping. "The trick is to know what you need, and keep that, getting rid of everything else on a regular basis. It will make your files neater and more effective, and it will make doing your taxes and other paperwork easier in the future."

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