Worcester Jewish Chronicle, March 24, 2004
Getting Your Financial House In Order Is A Must
William E. Philbrick, CPA, MST, CVA, CFF
Ever tear your bedroom apart looking for that birth certificate; sure you had safely stashed it in your sock drawer? Or pulled an all-nighter organizing your tax records after spending the previous three days looking for documents and receipts? If you have, this information will help you gain control of your financial house.
Whether you are a pack rat, saving every piece of paper in the first draw or shoe box you find or the laissez faire filer, who saves some and discards some, depending on your mood, you’ll be left scrambling when you actually need to find an important document.
The time and effort to organize your financial records pays off in more ways than less frustration. First, organized records will make your tax preparation easier and less time consuming. Complete tax records will help remind you of deductions you might otherwise overlook and they come in handy if the IRS questions your return, helping to avoid interest, penalties, or additional taxes. Second, good records will give you a better handle on your overall financial situation and help your CPA identify financial and tax-planning opportunities. Lastly, should you die or become incapacitated, a well-organized records system will ease the burden on your loved ones by providing a road map to your financial affairs.
To get started, begin at your local office supply store and pick up the items you need to start your filing system such as hanging files and manila folders, as well as a container to keep them in. If you prefer to keep electronic records, many software systems allow you to download electronic statements. You can help on space by scanning documents onto your computer. Make sure to keep a backup file in case your computer is ever damaged or destroyed. Don’t forget to get a quality paper shredder, more identity theft occurred last year from non-online sources than from the Internet. Discarded documents in the trash are prime sources for personal information.
You should divide your records into three categories. First are “current” files that you will be adding to through the year. Be sure they are located in a convenient location. Now find a spot for “dead” files. This is information you need to keep but won’t have to access often. A safe out of the way space, which is dry, will work for this purpose. The third category is your safe-deposit box. It is where you will keep documents that are costly or difficult to replace, like wills, deeds and car titles.
Now you need to sort that pile. What do you keep and what do you discard? While your personal circumstances will dictate your needs, consider six universal subject areas- taxes, banking, investments, retirement plans, insurance policies and your home for starters.
Starting with taxes, maintain a current file for this year’s return. Include all your income information and backup documentation for deductions, including receipts and cancelled checks. Add your past year’s return to this file. All other returns and related documents can be moved to the “dead” storage area. Plan to keep the prior year returns for six to ten years to be safe you are beyond the period the IRS has to question your return.
Banking records can take up a large part of your system. Keep separate files for each account for the current year and compare them to your 1099s at the end of the year. If they agree, discard the statements. After a year, you can discard cancelled checks except for those that support tax deductions and tax payments. Pull these and put them with your current tax file. Also keep cancelled checks that relate to a home purchase, capital improvements to your home, investments, and non-deductible IRA contributions.
Investment records files need to be maintained so you will have the documentation to establish your cost basis. Failure to do this could result in double tax. For example, reinvested dividends are currently taxable, but add to your cost basis when you sell.
Plan on holding your investment records a minimum of three years after the sale.
Set up a separate file for each retirement plan that you have. Each file should include enrollment papers, statements, a list of beneficiary designations and contact information.
This information will be very important if you have IRAs, which have contributions, which were made with pre-tax and post-tax income. You can avoid being taxed on the non-deductible contributions when you start to withdraw, if you maintain these files.
Your insurance record keeping is fairly simple. Make a file for each policy with the policy number, insurance company name, your agent’s name, what is covered and any beneficiaries. Imagine the ease of filing a claim with all these details at your fingertips.
If you own a home, set up a file on the purchase of your home. Next add a file on all improvements and additions. While there is a $250,000 exclusion on the sale gain, double if you are married. Don’t count on that to excuse keeping the records, as inflation can drive up prices and what Congress has given, Congress can take away.
Also set up an inventory file on your belongings. Include brand, model and serial numbers, purchase prices and replacement costs for big-ticket items. Photos or videos of your property are invaluable in the event of an insurance claim. Make copies of the inventory list, photos and video for your safe deposit box in case your home is damaged or burglarized.
If you don’t have a safe deposit box, rent one. It should contain personal records such as birth and marriage certificates, as well as adoption, citizenship and divorce papers. You also should have your proof of ownership for major possessions such as real estate, autos, boats, as well as stock or bond certificates. Again, while these can all be replaced, but not without a lot of time and effort.
You should also store your signed, original will in your safe deposit box. But you should also keep a copy at home and an additional copy with your attorney. Old originals and copies should be destroyed if you make any changes to avoid any confusion after your death.
Once you have gotten this far, one remaining step needs to be taken. This is the preparation of a personal financial review. Use a three ring binder and include a list of all your assets and liabilities. Include the account numbers, names and phone numbers of contacts. Then prepare a list of important documents, such as wills, power of attorney, and insurance policies, noting where they are located. Be sure to include the bank and location of your safe deposit box. Add the names of all your financial advisors, including your attorney and CPA. Once this is complete give copies to your next-of-kin, attorney, CPA and trustees, if any. Your CPA will use this information to make tax-planning recommendations, which could have been missed without it.
Once you have tamed the paper tiger, keep it under control by making it a weekly habit to go through your paperwork. Pay your bills and file any documents that you need to retain in the appropriate files. Once a year, give your system an overhaul. Discard any unneeded documents and files and move the old tax returns to the dead storage area.
Remember clutter is the enemy. Discarding unneeded paperwork is key to maintaining an organized financial record keeping system under control.
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William E. Philbrick, CPA, MST, CVA, CFF is a Senior Vice President and Director of Taxes and Forensic Services with Greenberg Rosenblatt Kull &Bitsoli, P.C. of Worcester, Mass. He can be reached at wphilbrick@GRK&B.com.