We regularly get the question of “How long should I keep my _____ records?” The _____ can be tax, estate, trust, bank, etc. The answer to that question is not always so simple, because it depends upon the type of record and a person’s situation. It’s also springtime. It is that time of year to start cleaning out the closets, the garage and the shed, all of which over the winter had become a repository for all that stuff that you just didn’t have the time to put away somewhere else.
In the corner of the closet, you find boxes of bank and brokerage statements and old tax returns. You do not like keeping the financial and tax records if you do not have to, with all that identity theft and the like going around. And those boxes full of paper take up so much precious space in the closet. What can you get rid of and what do you need to keep?
There are various statutes of limitations governing numerous activities that give guidance on timeframes. The statutes of limitations that most likely affect you would be the ones relating to contracts and taxes.
Federal taxes have one of the shorter statutes of limitations, three years. Generally, to assess taxes, the IRS has three years from the later of the due date of your return or when you filed the return. This statute of limitations can be extended in certain circumstances, such as if there is an audit, a substantial understatement of income or fraud.
Michigan taxes have a one year longer statute of limitations than the IRS. Generally, the Michigan Department of Treasury can assess taxes for up to four years from the later of the due date of your return or when you filed the return. Like the IRS, this statute of limitations can be extended for certain circumstances, such as if there is an audit, a substantial understatement of income or fraud.
Michigan contract actions have an even longer statute of limitations. You can generally begin an action to recover damages for breach of contract in Michigan for up to six years after the claim has accrued. The statute of limitations is extended to ten years in certain circumstances relating to covenants in deeds and mortgages.
If you are married and you or your spouse go into a nursing home and you want to qualify for Medicaid to pay for nursing home care, you have to document all the assets either one of you had an interest as of a “snapshot date”. This snapshot date is the first date after 1989 that began 30 consecutive days of continuous care in a hospital or long-term care facility. This then determines how much of these assets that the non-nursing home spouse can keep when the nursing home spouse qualifies for Medicaid.
So how long should you keep your financial records? To be safe, I recommend that you keep general financial and tax records for at least ten years. If you have sold or transferred any real estate, you should hold onto those records for fifteen years.
When you sell any capital asset, you have to document your tax basis of the asset to the IRS. You subtract your tax basis in the asset from the sale proceeds to determine your taxable gain or loss. Most capital gains are reportable and taxable, but only some capital losses are deductible.
For individuals, a capital asset is generally any anything you own for personal or investment purposes. Capital assets can include stocks, bonds, mutual funds, vehicles, real estate and collectibles. For any capital assets that you currently own, keep all records related to the purchase or other acquisition of the asset. Keep the details and records of all purchases of marketable securities, such as stocks, bonds or mutual funds.
If you own real estate, keep all of your original purchase documents, especially your title insurance policy. I have been told by legal counsel from the nation’s largest title insurer, Fidelity National Title Insurance Company, that they are only required to keep records, even for title insurance policies still in force, for seven years and after that they are destroyed.
So if you have title insurance through Fidelity National Title Insurance Company and have a title problem with your real estate after seven years, you could be out of luck if you cannot find your title insurance policy. If you cannot prove you had title insurance and Fidelity National Title Insurance Company has destroyed the records, they do not have to pay to clear your title. But isn’t that the reason you bought title insurance in the first place?
When you have made any improvements to the real estate, keep records of all those improvements so long as you own the real estate. Keep those improvement records for an additional fifteen years after the sale or transfer of the real estate.
If you have been gifted a capital asset during the gift-giver’s lifetime, your tax basis is generally going to be the gift-giver’s tax basis. This is called a carry-over basis. For any of these gifts, you have to get copies of all of the gift-giver’s records when they acquired the asset.
When you receive a capital asset on account of someone’s death, you generally get a step-up in tax basis. Your tax basis for determining your gain or loss on the sale is the fair market value of the asset on the giver’s date of death. For these assets you should keep records documenting the fair market value of the asset on the date of death.
If you are married and you or your spouse has spent 30 or more consecutive days of continuous care in a hospital and/or long-term care facility sin 1989, keep records of all assets as of the first day of that continuous care. That is your “snapshot date’ from which you determine how much of the assets that the non-nursing home spouse can keep when applying for Medicaid to pay for the nursing home care.
And for the records you are not going to keep, make sure they are shredded. You do not want them falling into someone’s else’s hands who then may be able to steal your identity. I know some people who are scanning all these documents before they are shredding them. They then have permanent archive of the records on their hard drive or flash drive or in the cloud if they are ever needed. Have fun spring cleaning!
By Matthew M. Wallace, CPA, JD
Published edited April 9, 2017 in The Times Herald newspaper Port Huron, Michigan as: Enjoy spring cleaning, but preserve financial records