Q&A: Keeping financial records

Dear Liz:I have a garage full of old financial records. I believe I need to keep only seven years of information for tax purposes. Is that correct? However, I have decades of receipts on house repairs and improvements since I believe there is some cumulative tax credit that might someday be important. Also, I have kept receipts on personal and household purchases in case of a loss that required an insurance claim. Am I keeping too much paper?

Answer: Yes. Here’s what you need to know.

Many tax experts recommend hanging on to your tax returns indefinitely, but you can shred most supporting documents after seven years when the risk of audit ends (unless you’re significantly underreporting income or committing fraud).

When it comes to assets such as homes or stocks, you should keep supporting documentation for as long as you own the asset plus seven years.

That includes receipts for home improvements, but not repairs. You can’t take a deduction for either home repairs or improvements, but the cost of improvements may help you reduce any taxable profit should you sell your home. In Publication 530, the IRS defines an improvement as something that “materially adds to the value of your home, considerably prolongs its useful life, or adapts it to new uses.” Examples include putting an addition on your home, replacing an entire roof, paving your driveway, installing central air conditioning or rewiring your home. You can’t include improvements that are no longer part of your home. If you install carpeting and then rip it out to install hardwood, for example, you can no longer include the carpeting cost as an improvement.

You would have to have a considerable profit for those receipts to come in handy. The first $250,000 of home-sale profit, per person, is tax free. If you’re married, that means you wouldn’t face capital gains taxes on your home sale unless your profit exceeded $500,000.

Keep in mind that the IRS accepts electronic records. If you’re concerned about tossing paperwork you might later need, consider scanning everything first and maintaining a backup copy off site, either in the cloud or in a safe-deposit box.

Chances are good your insurer also accepts electronic records and scans of receipts, but call and ask first. Keeping receipts for insurance purposes is a good idea, as long as you cull the ones for items you no longer own.

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