Financial Recordkeeping Saves Money and Worry

Keeping good financial records may save you money on taxes and may also keep you from worrying about finding appropriate information when you need it.

“Read and keep all documents that you receive from your broker, investment adviser or mutual fund company,” says Pat Swanson, CFP® and families specialist with Iowa State University (ISU) Extension’s Invest Wisely Project (www.extension.iastate.edu/investwisely). “Check to make sure your account statements are accurate. At the end of each year after receiving your year-end statement, you can throw the monthly statements for that year.”

Make sure you can prove your basis, which is the acquisition cost assigned to an asset for income tax purposes. “If you sell an asset and cannot prove your basis, the IRS can apply a basis of zero, which can be a costly mistake,” Swanson says. Keeping records of how you acquired securities (purchased, inherited, received as a gift or distributed when a company went from being a mutual company to a stock company) and your basis in the security is a necessity. This is important not only if you sell the security but also if you give the asset as a gift. When something is given as a gift the donee takes the same basis as yours (the donor).

And how long should you keep your tax returns? “Some suggest you keep tax returns for three years but it would seem that for no more space than they take up, keeping them for a longer period of time is not a bad idea,” Swanson advises. “Along with the tax returns you should keep all the 1099s, state tax refund documents, and other information used to prepare the return. There may be times when past returns could provide useful information for current transactions. Gift tax returns should be kept forever. You can give a gift of up to $12,000 per year -- $24,000 for married couples -- to any number of individuals with no tax consequences. If you give more than $12,000 to an individual donee, a gift tax return must be filed.”

When you own stock and use a dividend reinvestment plan it is an easy and costless method to reinvest the dividends, but there is a drawback when it comes to tax time. “You need to keep track of your basis because you paid tax on the dividends that were reinvested. If you don’t have the necessary records you may pay tax on the same income twice,” Swanson explains.

Swanson says if you donate stock to a charitable organization you will need to keep track of what was donated, the day of the donation, the fair market value of the shares, your basis in the asset, and if there were any restrictions on the gift. For an outright gift the fair market value of the shares is the sum of the opening price of the shares on the day of the gift, plus the ending price, divided by two. “It doesn’t make any difference what the charitable organization sells the securities for -- that average price for the day of the gift is the amount of the donation you use for tax purposes.”

Swanson has this to say about records on your home. “Current tax laws permit a couple to exclude the first $500,000 of capital gain on the sale of a principal residence -- $250,000 for a single person – regardless of your age and regardless of how many homes you have sold in the past.”

The exclusion rules apply even if you previously qualified for and took a previous ‘once-in-a-lifetime’ tax exclusion on a prior home sale. “Even though this provision regarding no capital gains tax on the sale of your home is in place now, tax laws can change. So it is best to keep good records involving your home, including the purchase price, additional amounts spent on improvements to the home, and any other factors that affect its basis,” Swanson says.

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The ISU Extension Invest Wisely Project provides a series of newspaper, radio, and web resources for investors.  It is funded by a grant from the Investor Protection Trust (IPT).  The IPT is a nonprofit organization devoted to investor education.  Since 1993 the IPT has worked with the States to provide the independent, objective investor education needed by all Americans to make informed investment decisions.  www.investorprotection.org.