Some tax records can be tossed now, but keep others

Posted3/3/2017 6:00 AM

Many homeowners keep lots of billing statements and receipts, leading to overwhelming clutter. Some of the paperwork can be thrown out now, but others should be kept for several years or indefinitely.

Q. I have owned my home for 17 years, and I have kept every monthly mortgage statement, utility bill and the like since I purchased the house in 1999, in case the Internal Revenue Service ever audits my income-tax return. As you might guess, all of this paperwork takes up a lot of space in both my den and garage. When can I start throwing some of it out?


A. You can toss a lot of it now, but you should keep other parts of it forever -- or at least until you sell your house.

Unless fraud is suspected, the Internal Revenue Service generally cannot initiate an audit more than three years after an individual tax return is filed (though the time frame stretches to six years for people who own their own business).

Keep copies of your actual income-tax returns forever. Lenders will want to see the most recent ones if you apply for a mortgage to purchase a new house or to refinance your current property, and the duplicates will help if you get into a beef with the IRS now or with the Social Security Administration when you retire.

Also, keep receipts and canceled checks for any remodeling projects you might have undertaken: The IRS allows the cost of most remodeling jobs to be added to the "adjusted cost basis" of the original purchase price of your home, which may save you thousands of dollars in taxes when you eventually sell.

If you take the home-office deduction, you'll also need to keep copies of old utility bills and the like in case you're audited.

Most of your other documents (including your monthly mortgage statements) can be thrown into the garbage can. But you should tear them up or shred them first, because old financial records typically include personal information that can help a thief who rummages through your garbage to steal your identity and could then begin taking out credit in your name.

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Q. I recently received a junk-mail letter from a home-improvement contractor that says it "specializes in roofs, plumbing and fenceastration." I know what roofers and plumbers do, but what does "fenceastration" mean? I figured that it has something to do with building fences and tried to look it up in the dictionary, but I did not find an answer.

A. I have received similar junk-mail letters. You couldn't find the term in your dictionary because the contractor's ad misspelled it.

The correct spelling is "fenestration." The term has nothing to do with fences, but rather with how windows are placed in a home or other building.

Be wary of contractors who say they "specialize" in several different fields of the home-remodeling business. Installing a new roof takes a different set of skills than installing a new plumbing system. And if the contractor can't even spell the word that he claims he supposedly is an expert in -- in this case, fenestration -- you might want to call someone else if you want to add to or improve your windows.

Q. My husband and I are in our mid-60s. We purchased our home in 1987, and now it is worth almost $400,000 more than we paid for it. We are interested in forming the type of inexpensive living trust that you recently wrote about so our heirs will not have to waste a lot of time and money in probate court to get our property after we die. But if we place our home into a living trust and then decide to sell the house later, would we still be able to keep all of our resale profit tax-free?


A. Yes, all of your profit would likely remain tax-free. The IRS allows married couples to keep up to $500,000 (or $250,000 for singles) in home-sale profits away from taxation, provided that the property has been their primary residence for at least two of the previous five years.

This important tax break is provided to all homeowners, even if title to the property is held in a living trust rather than the joint-tenancy arrangement that most married couples choose when they first purchase a house together.

If you decide to create a trust and transfer your property into it, you will keep the same tax breaks that you currently enjoy while also lessening the emotional and financial burden on your heirs when you pass away.

• For the booklet "Straight Talk About Living Trusts," send $4 and a self-addressed, stamped envelope to David Myers/Trust, P.O. Box 4405, Culver City, CA 90231-4405. Net proceeds will be sent to the American Red Cross.

© 2017, Cowles Syndicate Inc.

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