CONSUMERS : A Way to Make the Season Less Taxing : Finances: By setting up a filing system for tax documents now, you’ll have a better chance of being ready next April 15.
It’s that dreaded time of the year again: tax season. And if you’re knee-deep in papers that need to be sorted, you’re stuck with a nasty, time-consuming task. Why not get organized now for next year?
But which important papers and records to keep and which to toss? And where and how long to keep them?
“The first thing is to try to take a more organized approach than most people do,” said Tom Gau of Kavesh & Gau, a financial planning and tax preparation firm in Torrance. “Get a file cabinet and put it in a corner, even a closet. Then buy file folders and put things in a logical order. It’s a lot easier to find things when you do that.”
Categorize your files in separate folders: tax returns, property documents, utility bills, personal and family records, insurance, medical and health records, and financial statements.
You also should keep a master notebook--a loose-leaf version is recommended--listing each category and its contents. The book should open with personal information: your name, address, place of employment, home and office phone numbers, Social Security number, next of kin and their addresses and phone numbers.
Although financial advisers disagree on the maximum number of years you should keep copies of your income tax returns--some advise as long as 10 years--most insist on a minimum of four years. A good rule of thumb is to keep them six years.
Here’s why: California’s Franchise Tax Board can examine or challenge your state return for four years; by law, the Internal Revenue Service requires you keep income tax records for at least three years from the date the return was filed. The normal period for an IRS audit, without reason, is three years.
But if the state or the IRS has reason to suspect you failed to report more than 25% of your income--mostly in the cases of being self-employed--they can investigate you for a period extending back six years. If they suspect you of filing a fraudulent return, or none at all, there’s no time limit.
All documents supporting the return, including a copy of your W-2 stating your income from that year, should be kept year by year with a copy of each return in a separate folder. As you file your yearly return, discard the folder that is more than 10 years old.
There’s no sense in cluttering up the house forever with utility bills, but it is smart to keep them for two or three years. (Keep them longer if you work at home and deduct part of your utility costs.) Why keep these documents?
By law, municipal utilities “have the right to go back two years to recover lost revenue,” said Jim Derry of the Department of Water and Power. If DWP finds a billing error, say through one of its periodic audits, “we can bill you,” he explained.
Public utilities--such as Southern California Gas or Southern California Edison--can go back further, up to three years to make billing adjustments, if the agency believes there’s been a consumer error or fraud, reports the Public Utilities Commission.
Store original documents (deeds, title papers, mortgages, car titles) in a bank safe-deposit box or in a fireproof home safe. Keep copies of them in your home records file.
In a separate folder, keep records of all home improvements; save receipts, even for a can of paint, because some improvement and remodeling costs can be deducted.
Safe-deposit boxes range in size and cost anywhere from $15 to $100 a year. Don’t keep important documents in spots like desk drawers because they can disappear in disasters--fires, earthquakes and the like. Fireproof files can be purchased at stationery or hardware stores for $50 to $125. Be sure your model is fireproof and will withstand temperatures of 1,200-degrees Fahrenheit, the heat of a typical house fire. For about $200 (without installation), you can buy a metal floor safe that can be sunk into concrete.
It’s a waste of money to buy many of the cheaper fire-safe files, said Dee Erickson, general manager of Wolcotts Legal Forms and Stationery store in Downtown Los Angeles. “People want something for nothing,” Erickson said, “so they buy these other ones that are a lot less expensive, but only protect up to 500- or 600-degrees Fahrenheit. They’re no good.”
Like property documents, the originals of most personal and family papers--including birth and death certificates, marriage or divorce decrees, citizenship papers, military records and proof of custody or adoption--should be kept in a safe-deposit box, with copies in a home file. Some experts recommend that you stash your passport in a safe-deposit box, but other experts say to keep it in a safe place at home in case you need it in an emergency--for instance, on a weekend when banks are shut.
List in your notebook: your bank’s name and address; your safe-deposit box, its number and where to find its key; the names of those with access to the box, and a dated list of its contents.
If you have no living relatives, consider giving a trusted friend access to your safe-deposit box, in case of an emergency or your death. To accomplish this, you and your pal can go to the bank and sign a power of attorney, or you may have the document notarized, then taken to the bank.
As for your will, it is best to keep the original in a safe-deposit box but store a copy with your attorney.
Maintain a home file with copies of all your insurance policies--medical, life, home, car--along with receipts and checks to support your insurance claims.
Jan Milne, of the Western Insurance Information Service in Los Angeles, advises consumers to keep original policies in a safe-deposit box, with an inventory of their homes’ contents. They should “videotape or take photographs room-by-room and keep an itemized written inventory list with it,” Milne said. “They also should make sure to reevaluate the furnishings and the dwelling each year.”
(The service will provide consumers with a free, preprinted room-by-room inventory list to compile; write to WIIS, 3530 Wilshire Blvd., Suite 1465, Los Angeles, Calif. 90010.)
Most experts think it’s safe to store banking records--including such items as savings passbooks, loan agreements, cancelled checks and promissory notes--in a home file.
But originals of securities, stock certificates or bonds should be kept in safe deposit or by a brokerage. List the securities you own and their serial numbers in your home files, which also would be a good place to store current, pertinent family medical records.
Finally, remember to update your records notebook yearly. Keep the original in a safe-deposit box and a copy at home.
