How long should documents such as bank statements, tax returns, and medical bills be kept? What type of personal recordkeeping should be maintained for tax purposes, and insurance, loan, or government benefit applications? Here are some tips to help you organize your files and avoid unnecessary clutter.
What types of documents are important? Since we are in the midst of tax season, let’s begin with information necessary to file a tax return. General information would include documents that provide proof of income and expenses. An individual’s income is verified by IRS forms W-2, K-1, and 1099; bank statements; and statements from investment accounts. Throughout the year, it is helpful to make notations on banking records for items that are unusual, such as large deposits or account transfers. Notations can help trigger your memory so that these funds can be easily justified to various government agencies such as the IRS or Department of Public Welfare (DPW). Proof of expenses can be in the form of sales slips, invoices, receipts, cancelled checks, and written acknowledgements from charitable organizations. Documentation of expenses is important if you claim deductions on your tax return. Expenses that are paid by check or credit are much easier to track than those paid for with cash, so when possible, use one of these methods of payment, even for routine expenses. Accurate documentation can help you avoid an expanded audit, or make the process of applying for government benefits easier. A complete listing of information required by the IRS for various credits, exemptions, and deductions can be found in Publication 552 at www.irs.gov. While the completion of a tax return is best handled by an accountant, elder law attorneys use previously filed tax returns as an important source of information when planning strategies to meet the costs of long term health care. The American Bar Association recommends keeping personal income tax returns, W-2 forms, and all records relating to IRA and other retirement accounts forever, although some professionals advocate keeping income tax returns for a minimum of seven years before destroying them.
Four years is the length of time recommended for keeping records related to the sale of an asset, such as a home or investment. In case a senior might need to apply for Medicaid, an extra year is recommended as the Department of Public Welfare has a five year look-back period. These types of records should include proof of ownership, and the purchase and sale prices of the asset. For a home, keep receipts for major improvements and repairs, appliances, and landscaping. Other records that should be kept for this period of time include business records and items that support deductions on IRS Form 1040.
Seven years is recommended for purchases and expense bills; bank statements and cancelled checks; records relating to special items such as educational savings accounts or the sale of municipal bonds/treasury securities; and records relating to inheritances, large gifts, or lawsuit settlements.
Additional documents which are important to keep for an extended period of time include: mortgage documents (for the duration of the mortgage. When paid off, keep the record of satisfaction for as long as you own the property); life insurance policies (duration of the policy, plus 3 years); personal health records (indefinitely); and medical bills and health insurance premium statements (5 – 7 years, depending if they were used to claim deductions on tax returns). Items which can be shredded sooner are ATM receipts (after you balance your account each month), utility bills (3 months), and pay stubs (only the most recent is needed if each stub includes a payment history for the current year. Keep the final pay stub for each year of employment).
Business and personal records should always be kept separately, as well as financial records for individual family members if multiple adult generations are residing together. Although keeping finances separate in these situations may require a little more effort on a daily basis, it is much easier than trying to reconstruct the past. For situations in which multigenerational families are sharing major expenses (such as mortgage payments), a formal agreement which specifies the details of payments (such as frequency and amount), can prevent headaches later on when specific financial information is required for a public benefits application, or settling family disputes.
Specifically for seniors, records pertaining to the following items are needed by elder law attorneys when planning for an application for government benefits: pension and social security statements, documents relating to prepaid funeral/burial arrangements, proof of bank accounts closed within the previous 5 years, motor vehicle titles, the tax assessed value of real estate, and documentation of military service (by the individual or spouse). Military service documents should be kept forever.
Records may be kept on paper or in an electronic storage system. The IRS has specific requirements regarding electronic storage systems, which should be reviewed to ensure compliance prior to destroying paper records. When paper records are destroyed, the preferred method is shredding, in order to reduce the chance of identity theft. One final recommendation is that family members share with one another the location of important records. Whether young or old, we never know when something may happen which might require us to have the assistance of someone else to manage our affairs. Keeping records together in a known location can reduce frustration and save families time and money.
Karen Kaslow, RN, BSN