Our office receives many inquiries about how long a taxpayer is required to keep his records to support his tax returns or protect him in case of an audit. The following article from Bankrate.com explains the basics. Please contact our office with any additional questions or comments.
How long to keep financial records
By Bankrate.com
You can't take everything with you, but the following are suggestions about how long you should keep personal finance and investment records on file:
Financial Records Timeline - Type of record Length of time to keep, and why:
Tax records should be kept for: Seven years
Returns
Canceled checks/receipts (alimony, charitable contributions, mortgage interest and retirement plan contributions)
Records for tax deductions taken
The IRS has three years from your filing date to audit your return if it suspects good-faith errors.
The three-year deadline also applies if you discover a mistake in your return and decide to file an amended return to claim a refund.
The IRS has six years to challenge your return if it thinks you underreported your gross income by 25 percent or more.
There is no time limit if you failed to file your return or filed a fraudulent return.
IRA contribution records: Permanently
If you made a nondeductible contribution to an IRA, keep the records indefinitely to prove that you already paid tax on this money when the time comes to withdraw.
Retirement/savings plan statements From one year to permanently
Keep the quarterly statements from your 401(k) or other plans until you receive the annual summary; if everything matches up, then shred the quarterlies.
Keep the annual summaries until you retire or close the account.
Bank records: From one year to permanently
Go through your checks each year and keep those related to your taxes, business expenses, home improvements and mortgage payments.
Shred those that have no long-term importance.
Brokerage statements: Until you sell the securities
You need the purchase or sales slips from your brokerage or mutual fund to prove whether you have capital gains or losses at tax time.
Bills From one year to permanently
Go through your bills once a year.
In most cases, when the canceled check from a paid bill has been returned, you can shred the bill.
However, bills for big purchases -- such as jewelry, rugs, appliances, antiques, cars, collectibles, furniture, computers, etc. -- should be kept in an insurance file for proof of their value in the event of loss or damage.
Credit card receipts and statements: From 45 days to seven years
Keep your original receipts until you get your monthly statement; shred the receipts if the two match up.
Keep the statements for seven years if tax-related expenses are documented.
Paycheck stubs: One year
When you receive your annual W-2 form from your employer, make sure the information on your stubs matches.
If it does, shred the stubs.
If it doesn't, demand a corrected form, known as a W-2c.
House/condominium records: From six years to permanently
Keep all records documenting the purchase price and the cost of all permanent improvements -- such as remodeling, additions and installations.
Keep records of expenses incurred in selling and buying the property, such as legal fees and your real estate agent's commission, for six years after you sell your home.
Holding on to these records is important because any improvements you make on your house, as well as expenses in selling it, are added to the original purchase price or cost basis. This adds up to a greater profit (also known as capital gains) when you sell your house. Therefore, you lower your capital gains tax.
Source: Marquette National Bank and Catherine Williams, President of Consumer Credit Counseling Services of Greater Chicago
Wednesday, March 17, 2010
Thursday, February 25, 2010
Start saving in your 20s if you want to get rich. Even if money is tight, this is the time to start stashing away money. Start small, start now.
It's easy to understand why retirement doesn't loom large on the horizon for 20-somethings. Young workers are more concerned with kick-starting careers, not ending them in the long-distant future.
But it's worth noting that the very fact that you're young gives you a huge edge if you want to be rich in retirement. That's because when you're in your 20s, you can invest relatively little for a short period and wind up with far more money than someone older who saves much more over a longer period.
Consider this scenario: If you begin saving for retirement at 25, putting away $2,000 a year for just 40 years, you'll have around $560,000, assuming earnings grow at 8% annually. Now, let's say you wait until you're 35 to start saving. You put away the same $2,000 a year, but for three decades instead, and earnings grow at 8% a year. When you're 65 you'll wind up with around $245,000 -- less than half the money.
Seems like a no-brainer, right? Save a little now and reap big rewards later.
Unfortunately, many of today's youngest workers pass on the opportunity to save for retirement early, when the beauty of compounding interest can work its magic and maximize savings. A study by human resources consultant Hewitt Associates found that just 31% of Generation Y workers (those born in 1978 or later, now in the thick of their 20s) who are eligible to put money into a 401(k) retirement savings plan do so. That's less than half of the 63% of workers between ages 26 and 41 who do invest in employer-sponsored savings accounts.
Start saving ASAP! There are plenty of reasons you may have yet to save, such as cash flow. If you're struggling to pay off student loans or cover rent, funding a 401(k) may seem difficult, if not downright impossible.
Sign up for that 401(k)! Make the most out of those few dollars you can get hold of by allocating them wisely. Don't squirrel them away under the mattress. You will want them to be invested in a way that will encourage your assets to grow as quickly as possible.
Where to start? If you're eligible to participate in a 401(k) at work, do so. There are plenty of reasons to love these plans but No. 1 by far is that most employers match your contributions in order to encourage your participation. The hitch: Oftentimes, you'll need to save enough to trigger the match.
In a typical plan, employers match up to 3% of your salary, according to the Profit Sharing/401(k) Council of America. When you sign up, the money you save is automatically deposited into the plan before it's taxed, so less of your income will be taxed now. That saves you money, too.
No company retirement fund? Use a Roth instead. If you aren't eligible for a retirement fund at work that gets you matching funds, sign up for the next best thing: a Roth IRA. You'll fund this with money that's already been taxed as part of your normal paycheck. But money in a Roth IRA withdrawn later is tax-free. Save what you can. It will add up. If you are able to sock away $4,000 a year into a Roth for 40 years, and if it earns 8% annually, you'll be a tax-free millionaire at retirement. To make sure you stick to saving, have a portion of your paycheck or payments from your bank account automatically deposited into the Roth each month or every few weeks.
Get educated! Meanwhile, don't be embarrassed to admit that financial talk can seem confusing. After all, financial know-how is not genetically encoded and, unless someone has taken the time to teach you about finance, you'll need to do a little learning. And now that you're starting to make and save money, this is the perfect time to educate yourself. Read books, articles or financial Web sites. The more you know, the easier it will be throughout your career to make solid, informed decisions.
Build a strong defense with an emergency stash. Start amassing an emergency fund so you don't have to rely on credit cards -- and possibly bury yourself in debt -- in the event that your car dies, your roommate comes up short on rent or you suffer some other financial mishap. Ideally, you'll stash up to three months living expenses, but the important goal is to save something. You can help stay on track by having automatic deposits made to your emergency account.
In the meantime, keep an eye on spending. Those splurges can add up fast and will prove to be a huge drain on future savings. What's more, if you pile on debt, you'll wind up wasting a lot of money on interest and fees that could be better spent elsewhere.
Avoid debt! If you're really struggling to stretch the paycheck to set something aside for retirement, this is the time to make some changes. Give your budget a major overhaul. Consider getting a roommate or picking up an extra job for the time being. Big changes now, coupled with consistent saving over time, will reap huge rewards down the road.
Excerpted from Bankrate.com
But it's worth noting that the very fact that you're young gives you a huge edge if you want to be rich in retirement. That's because when you're in your 20s, you can invest relatively little for a short period and wind up with far more money than someone older who saves much more over a longer period.
Consider this scenario: If you begin saving for retirement at 25, putting away $2,000 a year for just 40 years, you'll have around $560,000, assuming earnings grow at 8% annually. Now, let's say you wait until you're 35 to start saving. You put away the same $2,000 a year, but for three decades instead, and earnings grow at 8% a year. When you're 65 you'll wind up with around $245,000 -- less than half the money.
Seems like a no-brainer, right? Save a little now and reap big rewards later.
Unfortunately, many of today's youngest workers pass on the opportunity to save for retirement early, when the beauty of compounding interest can work its magic and maximize savings. A study by human resources consultant Hewitt Associates found that just 31% of Generation Y workers (those born in 1978 or later, now in the thick of their 20s) who are eligible to put money into a 401(k) retirement savings plan do so. That's less than half of the 63% of workers between ages 26 and 41 who do invest in employer-sponsored savings accounts.
Start saving ASAP! There are plenty of reasons you may have yet to save, such as cash flow. If you're struggling to pay off student loans or cover rent, funding a 401(k) may seem difficult, if not downright impossible.
Sign up for that 401(k)! Make the most out of those few dollars you can get hold of by allocating them wisely. Don't squirrel them away under the mattress. You will want them to be invested in a way that will encourage your assets to grow as quickly as possible.
Where to start? If you're eligible to participate in a 401(k) at work, do so. There are plenty of reasons to love these plans but No. 1 by far is that most employers match your contributions in order to encourage your participation. The hitch: Oftentimes, you'll need to save enough to trigger the match.
In a typical plan, employers match up to 3% of your salary, according to the Profit Sharing/401(k) Council of America. When you sign up, the money you save is automatically deposited into the plan before it's taxed, so less of your income will be taxed now. That saves you money, too.
No company retirement fund? Use a Roth instead. If you aren't eligible for a retirement fund at work that gets you matching funds, sign up for the next best thing: a Roth IRA. You'll fund this with money that's already been taxed as part of your normal paycheck. But money in a Roth IRA withdrawn later is tax-free. Save what you can. It will add up. If you are able to sock away $4,000 a year into a Roth for 40 years, and if it earns 8% annually, you'll be a tax-free millionaire at retirement. To make sure you stick to saving, have a portion of your paycheck or payments from your bank account automatically deposited into the Roth each month or every few weeks.
Get educated! Meanwhile, don't be embarrassed to admit that financial talk can seem confusing. After all, financial know-how is not genetically encoded and, unless someone has taken the time to teach you about finance, you'll need to do a little learning. And now that you're starting to make and save money, this is the perfect time to educate yourself. Read books, articles or financial Web sites. The more you know, the easier it will be throughout your career to make solid, informed decisions.
Build a strong defense with an emergency stash. Start amassing an emergency fund so you don't have to rely on credit cards -- and possibly bury yourself in debt -- in the event that your car dies, your roommate comes up short on rent or you suffer some other financial mishap. Ideally, you'll stash up to three months living expenses, but the important goal is to save something. You can help stay on track by having automatic deposits made to your emergency account.
In the meantime, keep an eye on spending. Those splurges can add up fast and will prove to be a huge drain on future savings. What's more, if you pile on debt, you'll wind up wasting a lot of money on interest and fees that could be better spent elsewhere.
Avoid debt! If you're really struggling to stretch the paycheck to set something aside for retirement, this is the time to make some changes. Give your budget a major overhaul. Consider getting a roommate or picking up an extra job for the time being. Big changes now, coupled with consistent saving over time, will reap huge rewards down the road.
Excerpted from Bankrate.com
Monday, February 22, 2010
13 tax changes you need to know before filing your 2009 returns
We found a concise summary of 2009 tax changes in the following AOL Walletpop personal finance article. Please contact our office to discuss any questions or comments you may have.
13 tax changes you need to know before filing your 2009 returns
13 tax changes you need to know before filing your 2009 returns
Wednesday, February 17, 2010
2009 Educational Credits and Deductions
If you are a taxpayer with higher education costs, you should be aware of the many tax benefits that are available to you. Generally, educational assistance such as scholarship, fellowship, or employer-provided educational benefits are excludable from income. For education costs not covered by educational assistance, tax benefits include the Hope scholarship credit (also known as the American Opportunity credit for 2009 and 2010) and the lifetime learning credit. Alternatively, you may have the option of deducting qualified tuition and fees expenses "above the line." These credits and deductions are coordinated with the exclusion for distributions from education savings plans, such as, Coverdell Savings Accounts and qualified tuition programs. For taxpayers who take out a loan to pay for their education, a deduction is available for the student loan interest.
The amount of the American Opportunity tax credit is computed as 100 percent of the first $2,000 of qualified tuition and related expenses plus 25 percent of the next $2,000 of such expenses, for a total maximum credit of $2,500. The lifetime learning credit is generally available for 20 percent of education expenses up to $10,000. For taxpayers who do not itemize, an above-the-line higher education tuition deduction can be claimed in 2009 for up to $4,000.
Each education credit and the deduction have adjusted-gross-income phase out limitations. In addition the education credits are coordinated with the deduction and Coverdell Savings Accounts and qualified tuition programs so that taxpayers cannot realize duplicate tax benefits for the same dollars of education costs. Because of the variety of tax benefits and the variations as to eligibility and the definition of qualifying education expense, some or all of the benefits may apply to you. Every taxpayer should review their tax plan in order to take maximum advantage of the tax savings for education.
Determining the best alternative for you and your dependents requires an analysis of your expected costs, resources, and income. We can advise you on the best course of action. Please contact our office at your earliest convenience to discuss your situation.
The amount of the American Opportunity tax credit is computed as 100 percent of the first $2,000 of qualified tuition and related expenses plus 25 percent of the next $2,000 of such expenses, for a total maximum credit of $2,500. The lifetime learning credit is generally available for 20 percent of education expenses up to $10,000. For taxpayers who do not itemize, an above-the-line higher education tuition deduction can be claimed in 2009 for up to $4,000.
Each education credit and the deduction have adjusted-gross-income phase out limitations. In addition the education credits are coordinated with the deduction and Coverdell Savings Accounts and qualified tuition programs so that taxpayers cannot realize duplicate tax benefits for the same dollars of education costs. Because of the variety of tax benefits and the variations as to eligibility and the definition of qualifying education expense, some or all of the benefits may apply to you. Every taxpayer should review their tax plan in order to take maximum advantage of the tax savings for education.
Determining the best alternative for you and your dependents requires an analysis of your expected costs, resources, and income. We can advise you on the best course of action. Please contact our office at your earliest convenience to discuss your situation.
Monday, February 15, 2010
How Do I ... Convert a Traditional IRA to a Roth IRA?
People are buzzing about Roth Individual Retirement Accounts (IRAs). Unlike traditional IRAs, "qualified" distributions from a Roth IRA are tax-free, provided they are held for five years and are made after age 59 1/2, death or disability. You can establish a Roth IRA just as you would a traditional IRA. You can also convert assets in a traditional IRA to a Roth IRA.
Before 2010, only taxpayers with adjusted gross income of $100,000 or less were eligible to convert their traditional IRA (provided they were not married taxpayers filing separate returns). Beginning in 2010, anyone can convert a traditional IRA to a Roth IRA, regardless of income level or filing status.
Comment: While you can only contribute a maximum of $5,000 to a Roth IRA for 2010 (plus a $1,000 catch-up contribution if you are over age 50), you can convert an unlimited amount from a traditional IRA.
Conversion is treated as a taxable distribution of assets from the traditional IRA to the IRA holder, although it is not subject to the 10 percent tax on early distributions. While paying taxes on conversion is undesirable, the advantages of holding assets in a Roth IRA usually outweigh this disadvantage, especially if you will not be retiring soon. Furthermore, if you convert assets in 2010, you have the option of including them in income in 2011 and 2012 (50 percent each year) instead of 2010.
For more details, including four ways to convert a Traditional IRA to a Roth IRA, please visit the newsletter section of our website at http://www.brummetandolsen.com/newsletter.
Before 2010, only taxpayers with adjusted gross income of $100,000 or less were eligible to convert their traditional IRA (provided they were not married taxpayers filing separate returns). Beginning in 2010, anyone can convert a traditional IRA to a Roth IRA, regardless of income level or filing status.
Comment: While you can only contribute a maximum of $5,000 to a Roth IRA for 2010 (plus a $1,000 catch-up contribution if you are over age 50), you can convert an unlimited amount from a traditional IRA.
Conversion is treated as a taxable distribution of assets from the traditional IRA to the IRA holder, although it is not subject to the 10 percent tax on early distributions. While paying taxes on conversion is undesirable, the advantages of holding assets in a Roth IRA usually outweigh this disadvantage, especially if you will not be retiring soon. Furthermore, if you convert assets in 2010, you have the option of including them in income in 2011 and 2012 (50 percent each year) instead of 2010.
For more details, including four ways to convert a Traditional IRA to a Roth IRA, please visit the newsletter section of our website at http://www.brummetandolsen.com/newsletter.
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