By: Arnold Lakind, Esq.
Our clients frequently ask for advice about which records they should keep, and for how long -- tax returns, insurance policies, and other papers. They are often surprised to learn how long most documents should be maintained.
Tax Returns and Records. Since the Internal Revenue Service can audit you for three years after you file for your tax return, it is advisable to keep your tax returns for at least three years. If you are a wage-earner with only W-2 income and the standard deductions, you can safely dispose of your returns after three years.
If your tax return is more complicated, it should be retained for a much longer period. That's because there is no limit to the time in which the IRS can audit a return if it suspects fraud. Generally, you can dispose of tax records after seven years from the date of filing.
Insurance Policies. Liability policies -- homeowner, personal liability and umbrella policies -- should be kept forever. New Jersey has a two-year statute of limitations for personal injury actions; the statute for property damage claims is six years. This means that a person can sue for personal injuries at any time within two years of the date on which the injury was sustained. People suing for property damage may bring suit six years after the date the cause of action arises.
The trouble with this rule is that it is sometimes unclear when a cause of action accrues. New Jersey courts are somewhat liberal in interpreting these dates, so lawsuits may be brought well beyond the time limits. For this reason, it is important to keep those policies -- you may never know when you may need them.
Health and life insurance policies are another matter. Once a policy is no longer in force and all claims have been paid you may dispose of it.
Investments. Hold on to records of all stock, bond, and other investment purchases. Your tax will be figured on the difference between the purchase price and the sale price, so you need to be able to prove the exact cost of your investments. You must also be able to document stock splits and dividends. These records should be kept with the tax return of the year in which you sell the investment, in case you are audited.
Bills can generally be disposed of upon receipt of the next monthly bill showing payment. However, bills that include charges you deduct from your taxes should be treated as tax records and kept indefinitely.
The IRS does not want to hear that the dog ate your records. Every home should have a safe place and a good filing system for important papers. And it may well pay to be a pack rat.