Records to Keep…Records to Toss

This is the perfect time of year to do some financial housecleaning. Once you pull your records for tax filing, take some time to figure out what paperwork you can discard because it’s no longer needed.

What to keep: It’s a good idea to keep copies of your tax returns forever —they are a great historical record of your earnings—but you can usually shred the supporting documents after three years, which is the length of time the Internal Revenue Service usually has to initiate a routine audit.

Keep records showing the purchase price of mutual funds and stocks held in taxable accounts, which you’ll need to figure the profit or loss when you sell. Also keep records of reinvested dividends in those accounts, which—don’t forget—purchase additional shares. Failing to account for the increased tax basis due to reinvested dividends may cause you to overpay your taxes when you sell.

Hold on to any 8606 forms reporting nondeductible IRA contributions and any Roth IRA contributions. You’ll need both in order to hold down the tax bill if you withdraw funds from either type of account.

Keep records of your home purchase and any major home improvements as long as you own the home. You can generally take up to $250,000 in home-sale profits tax-free if you’re single or $500,000 if you’re married, but you could owe tax on the some of the profits if you earn more than those limits or if you don’t live in the home for two out of the five years leading up to the sale.

What to toss: You can shred monthly brokerage statements after you check that everything matches up with your year-end report, and shred ATM receipts and credit-card receipts after the transactions appear on your monthly statement (unless you need the receipt for tax purposes). Discard utility, phone and cable bills after your payment shows up on the next month’s bill, unless you need to save the paperwork for taxes.

Warning: All of these records can include personal information that could be a treasure trove for identity thieves, so dispose of it carefully with a cross-cut or confetti model shredder. You can obtain more information about identity theft at the Federal Trade Commission's Web site.