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February is right around the corner, and our primary focus for the next couple of months will be on tax preparation.  For you folks at home, its time to start gathering the information necessary for filing your personal tax returns.  Every day the mailbox is full of forms and reports in all shapes and sizes.  Most people have a file (or garbage bag) where its tucked away to be sorted through later. 

One question I often hear is “What do I keep and what can I throw away?”  It’s a valid question when the paper keeps piling up year after year.  Generally, I respond with a one-year and three-year rule.  Keep everything for one year that  supports the transactions for that year.  Then when you are compiling information for your tax return, you can discard anything that doesn’t pertain to income or deductions for the return, or anything for which you have a year end statement that covers the year.  For example, personal care expenses like the hairdresser and clothing generally are not deductible.  You do not have to keep receipts for these items.  Also, some credit cards issue a year end statement that shows all expenses for the year.  Once you have that, you don’t also need to keep the monthly statements.

The three-year rule pertains to things that do impact the tax return.  The IRS can go back and audit the prior three year’s returns, and if that happens, they may want to see receipts and supporting documentation for everything claimed on the return.  But if you haven’t heard from them, and are still holding old records from say, 1995, go ahead and clean house.

Of course, neither of these rules pertain to permanent documents, like the purchase of your home, or the cost records on stocks and bonds.  Keep the acquisition documents on any assets you still own.  You will need them to establish basis in the event of a future sale.

Also, take care in disposing of personal records.  A shredder is best, but a personal bonfire could be more fun!