Managing Money : Save Tax Records as Long as Needed for IRS Reviews
QUESTION: How long should I keep the records I used to prepare my income taxes?-- T. R.
ANSWER: A flippant response would be: “It depends on how honest you are when you do your taxes!” But, basically, you should keep your records long enough to answer any questions that the Internal Revenue Service might raise about your return.
Federal law limits how far back the agency is allowed to question your return. The statute of limitations is three years for improper tax deductions. Hence, it’s probably best to keep canceled checks, credit card statements, bank statements, property tax bills, medical bills and any other record that helped to calculate a deduction for at least four years.
The IRS has six years to pursue understated income. So you should save all records dealing with your sources of income for at least seven years.
But beware. There is no statute of limitations on fraud or suspected fraud. So, only you know how long you need to keep your records.
Q: I recently left a permanent hospital nursing job where I was making contributions to a pension plan. Now I am working through a nursing registry which does not offer a pension plan of any kind. May I set up my own individual retirement account or Keogh plan and make tax-free contributions?--B. A.
A: Before we can answer this, we have to make a couple of assumptions--namely, that you left your permanent job sometime in 1988 and that your relationship with the nursing registry is as an independent contractor, not an employee.
Now for the answers. Because you were employed by the hospital--and covered by a qualified pension plan--you are not eligible to establish an IRA for 1988. However, if you are still with the nursing registry--and still not covered by a qualified pension plan--in 1989, opening an IRA would be a great, and tax-deductible, idea. You are allowed to contribute up to $2,000 (or $2,250 if you have a non-working spouse) to an IRA and deduct that amount from your income on your federal tax forms.
Rules for establishing Keogh plans are a bit different. As a self-employed nurse contracting through a registry, you would be allowed to open a Keogh account for 1988. Your contributions would be limited to 15% to 25% of your total income, depending on the type of Keogh plan you open.
One last note: Earnings in IRA and Keogh accounts are not tax-free. They are tax-deferred. Confusion often arises because you do not pay income tax in the year you actually earn the funds. However, when you withdraw from these accounts, you will be taxed. But because retirees are generally taxed at a lower rate than a full-time working adult, your tax liability on the withdrawal should be lower.
Q: I just repaid the balance on a 30-year mortgage. The lender wants me to pay a $70 to $100 fee, a charge the institution claims covers the costs of reconveying title to the property back to me. Is this fair? Is there any way I can avoid some or all of this cost?--D. G.
A: Whether the charge is fair, of course, depends on whether you’re the one charging it or paying it. The fee is supposed to cover the cost of preparing and recording the document that gives you full title to the property. Lenders say they charge what it costs them to prepare the paper work, execute and record the document. On the average, industry insiders say, lenders charge about $75 to handle the reconveyance documents. The range is from under $50 to as much as $300.
But borrowers often feel they are paying a premium for what they consider to be fairly routine tasks. Michael Hiller, an Encino lawyer specializing in real estate matters, argues that a reasonable fee for this transaction should be in the range of $25 to $50. “Anything over $50,” he says, “is exorbitant.”
Hiller suggests that if property owners believe that they are being charged too much for reconveying the title, they should offer to handle the transaction themselves. The borrower should ask the lender for the “executed” reconveyance document. The document should then be filed with the county recorder’s office in the county where the property is located. Recording fees vary from county to county, but most agencies charge less than $15 to process the reconveyance document. However, all of this may soon be moot. A bill pending in the California Legislature would fix the amount at $65. The bill, AB 3893, has been approved by the state Assembly and is awaiting final approval by the state Senate.
A quick note on U.S. savings bonds. Although sophisticated investors have looked down on the simple Series EE savings bond, these bonds have recently become more popular among individual investors. Over the past few years, the government has increased the interest rates they carry to make them competitive and is even allowing the rates to fluctuate every six months to stay in sync with other variable-rate investments.
Now comes a new marketing drive for the Series EE. Investors may buy them over a toll-free telephone line and charge the purchase to their MasterCard or Visa cards. The number is 1-800-US-BONDS. The line is staffed 24 hours a day, seven days a week. There is no additional charge to the buyer for the telephone and charge service.
To refresh your memory, Series EE bonds are available in minimum $25 lots. They pay a minimum of 6% interest if held for at least five years. At maturity, a bond that cost $25 is worth $50. Currently, the Series EE bonds are paying 6.9% interest. The rate is adjusted twice a year: Nov. 1 and May 1 and is 85% of the rate paid on five-year U.S. Treasury securities. At the current rate, a bond would mature in 12 years.
Many financial planners are recommending the Series EE bonds as an easy, safe and convenient way for youngsters to accumulate a college fund. Interest on the bonds is exempt from state and local taxes. Federal income tax on the interest is deferred until the bonds are cashed in.
Carla Lazzareschi cannot answer mail individually but will respond in this column to financial questions of general interest. Please do not telephone. Write to Money Talk, Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, Calif. 90053.
