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.
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.