Monday, March 17, 2014

The responsible way to keep tax records

For many readers, this is another three-day holiday weekend. Tomorrow is a day that a lot of people will call in to work claiming they’re ill and can’t work on St. Patrick’s Day. There will probably also be a spike in illness two weeks later when the Tigers open the season at home on Monday, March 31.

Although I’m not Irish, I can certainly understand the St. Patrick’s Day festivities. And, who can’t get excited about the Tigers? Even if you’re not a baseball fan, the Tigers opening day is a sign that winter is over.

Personally, I save my “sick day” for April 15. Like many, I feel fortunate from a financial perspective. But, even though the government takes so much taxpayer money, what upsets me most is not the amount, but their poor stewardship of our tax dollars.

For as long as I can remember, every year there seems to be a number of public junkets on the taxpayer’s dime. An IRS Star Wars party comes to mind. Plain and simple, Uncle Sam tends to be inefficient and wasteful when handling money. It’s enough to make anyone ill.

In just a few weeks, I’ll start receiving emails from clients asking how long they need to keep their tax records. My answer is a lot longer than many tax experts suggest.

Call me a pack rat, but I disagree with experts who claim you can get rid of your tax records from three to six years after filing. I can cite many examples where old returns, along with supporting data, have come in handy.

For example, Social Security no longer sends paper statements. You’re responsible to log onto their website and review your records. Early in my career, I had some clients near retirement whose Social Security data showed they had $0 income for two years. My clients knew it was wrong, but it was their responsibility to prove the information was inaccurate.

What better way than an old W2 to substantiate your claim? Can you imagine having to postpone your retirement because records showed you didn’t have the proper 10 years in the system? Old tax records can also be used as your “proof of purchase” on an item you depreciated on your tax returns over a number of years.

Another situation I’ve often encountered with clients is confusion over whether or not their IRA plans are deductible. Old tax records can help an advisor or tax preparer reconstruct the records to help unwind the problem. After all, who wants to pay tax on the same dollar twice?

Over the years, I’ve also had meetings with a surviving spouse who had little to do with handling family finances. Old returns can be an adviser’s window into past investment activity. In fact, once while going through a widow’s pile to shred, I discovered records that resulted in a sizeable amount of money for her benefit.

These are just a few examples of how old tax returns can be beneficial. It might not be as exciting as souvenir beer mugs from St. Paddy’s Day or the Tigers’ opening day program, but I suggest you also find room in your basement for your old tax returns and supporting data. You never know when it might pay off.

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