Record Retention Requirements

There is, unfortunately, no single, simple, recommendation as to the length of time you should keep records. Tax and other potential legal disputes (such as insurance claims, real property disputes, divorce, and bankruptcy) have varying time requirements. Some people have the capacity (of storage space and organizational ability) to keep records as long as might be necessary under any circumstance. Most of us do not. Fortunately, financial institutions are increasingly computerized, and keep their records longer and longer. For a (hefty) fee, they will dig into their archives for you.

If you are good with computers, you can save significant storage space by scanning and archiving your important paper records onto permanent computer storage. Beware that even CDs, which are supposed to be relatively permanent, may last only a few years. The cheaper CDs use cheaper manufacturing techniques, such as dyes, that can make them last only a few years, depending on your storage method. Beware also that today's standard is tomorrow's historical oddity. How many of us can read 5" floppy disks, or play LP recordings?

Here are my suggestions for the tax requirements, in increasing order of time.

Keep most original records, such as credit card and bank check copies, journals, and statements, for five years. The normal Federal income tax statute of limitations is three years from the date you file, including any filing extension. California's income tax statute is four years. If the government argues fraud or substantial understatement of income (which it rarely does), the statute can increase to seven years. Five years is a good compromise for most of us. For example, in 2004 destroy most of your original records from 1999.

Keep real estate, common stock, and other asset records for five years after you sell the asset in a fully taxable transaction. Keep basic purchase and sale records for most any asset, such as common stock. Keep improvement and refinancing escrows for real estate. If you exchange the asset in a tax free transaction, keep all the records on the old asset until five years after you sell the new asset. If you give the asset to a family member, also give him/her the tax records to keep for five years after sale in a fully taxable transaction.

Keep your tax returns and the underlying important tax records forever. Most people can fit a lifetime's tax returns in a file box. Let your heirs throw them away. The underlying important tax records include W2s, 1099s, annual income statements and balance sheets, and real estate closing escrow statements.

Keep records for many generations under the current Estate tax rules that take effect in 2010. Currently, your heirs get a write up in basis when you die, whether or not you pay Estate tax. Starting in 2010, there is no Estate tax, but you pay tax on capital gains, measured from your ancestor's basis (cost). Alas, IRS says that if you cannot prove your basis, then your basis is zero! So you must keep records until the family sells the asset.

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William M West Certified Public Accountant
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San Jose, CA 95126
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Last Updated 2-5-04
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