Money Monday: Shred it and Forget it? Not So Fast…

Now that Spring has officially arrived, it’s time to engage in the obligatory tradition of spring cleaning. Yes, it’s that time of the year when we try to declutter our homes and living spaces from documents and papers we’ve acquired over the years. But what documents should you retain, for how long and why, and which ones should you shred? Why is this important? It is essential because it could cost you money if you don’t have documentary evidence to support your position in some cases. Let’s check it out!

House Records

With the current housing market being hot, you may decide to sell or not to sell your house. Let’s say you choose not to sell your home but perform some renovations making things more comfortable for you. Keep all the bills and receipts associated with major repairs, renovations, additions, and improvements. You may be wondering how long you should hold on to those bills? The answer is, for as long as you own the house. Why? Let’s talk tax!

Say you and your spouse performed renovations at your current residence and decide to sell it next year. The renovation cost incurred will help reduce your tax liability when you sell the house in 2023. Here is how it works. If you bought your house for $250,000 many years ago and have now performed renovations or improvements costing $50,000, you will have no tax liability when the house for $800,000 is sold next y. You bought the house for $250,000, which is your cost basis. You made improvements costing or valued at $50,000. It means that the total cost of your house is now $300, 000 ($250,000 cost + $50,000 improvements). In 2023 when you sell the house for $800,000, you will have earned a profit of $500,000 ($800,000 sale price – $300,000 cost). Are you going to be taxed on the $500,000 as a couple? NO! Fortunately, the Internal Revenue Service (IRS) provides couples an exclusion of $500,000 when they sell their home. Yes, even the IRS extends grace sometimes. There you have it; you owe Uncle Sam NO MONEY! But that’s because you saved the bills, receipts, and invoices from the improvements and renovations made over the years totaling $50,000, and now your cost ba-sis $300,000.

On the other hand, if you didn’t save the bills, receipts, and renovation improvement cost, which totaled $50,000, your cost would only be the $250,000, the original price paid for the house. In that case, your profit from the house sale would be $550,000 ($800,000 less $250,000). The problem now is that your IRS exclusion is only $500,000, but your profit is $550,000. Therefore you will have to pay taxes on the additional $50,000 just because you didn’t save the paperwork associated with repairs, renovations, and or improvements. Shred it or save it? Save!

Finally, if you inherited a house, thank goodness you don’t have to return and retrieve the original cost and improvements made before you inherited the house. Why? Because your cost of the house will be the fair market value at the time of your inheritance. In tax language, they call that the “stepped-up basis.” But you don’t need to understand the details, know IRS language, or be able to speak in tongues. Just keep records of renovations or repairs you made since you have inherited the property.

Investments Records

Digital currency and cryptocurrency are the latest investment buzz. When investing in cryptocurrency, you should retain your sales records for at least four years, and if there were losses, records should be kept for seven years. While some cryptocurrency platforms may send you a record of your transactions, not all of them do. At the end of the day, you, and not the company, are responsible for keeping a record of your transactions. Currently, there are a least two basic transaction events for which you will need to retain records. The first is when you sell cryptocurrency, whether it results in a gain or a loss. The second event is when you use cryptocurrency to purchase an item, for example. There can also be a gain or loss resulting in a taxable event in such instances. What makes it challenging is that currently, there are no laws mandating platforms or companies to report the cost basis of cryptocurrency transactions. This scenario is entirely different for stocks, mutual funds, and exchange-traded funds, also known as ETFs.

In 2011, the law required financial institutions to issue reports reflecting cost basis and other investment information when stocks are purchased or sold. Additionally, these institutions generally retain records for several years if you ever need reports. In 2012, the law required financial institutions to provide customers with financial statements reflecting cost basis and other investment transactions regarding ETFs and mutual funds. The takeaway here is that since there are NO laws in place requiring platforms to retain cost basis and other financial report activities when it comes to cryptocurrency, you will need to develop your own financial investment GPS to stay on top of your investment transactions. You could pay more taxes than necessary in capital gains or ordinary income tax if you shred those documents. The current capital gains rates are 0%, 15%, and 20%. Throwing these reports away is like, throwing money away!. Save it or shred it? Save it!

Tax and Retirement Records

Generally, you should receive annual statements if you participate in your employer’s traditional 401K plan at work. Those records need to be retained for at least four years. However, if you have not contributed to a Traditional Individual Retirement Account (IRA) but a Roth IRA, you may want to keep those records indefinitely! Why? Since a Roth IRA is funded with after-tax dollars, you have already paid taxes on those amounts, and therefore any withdrawals executed later should be tax-free. Retaining those records would go a long way in proving that you have already paid the taxes on those funds. Save it or shred it? Save it!

Finally, if you filed your tax return three years ago and have not been audited, you MAY get rid of those records. The rule is that the IRS has three years from when your tax return is filed to audit you. But if you somehow manage to underreport your income by a substantial amount, they have at least six years to audit you. Anyway, since we are talking about the IRS, things can get complicated. If you are self-employed or have your own business, you will need to retain those records for more than three years, even if not audited. If you owe the IRS and have not paid off those amounts, you might want to retain those records. The same is true if you are awaiting your refund from several years ago. Yes, I did say refund from several years ago. Let’s put it this way, I have a client who recently received their refund from 2017. I’m just saying! Save it or shred it? Save it!

Let’s talk Money Monday on the Zoom Conversation on March 28, 2022, at 7:00 p.m. Sign up at:


Today’s what’s up is about bank overdraft fees. Did you know that there is a trend taking place with banking fees? Yes, Capital One Bank has eliminated charging customers overdraft fees. Banks in the past had earned significant revenues from fees. Still, the Consumer Financial Protection Bureau (CFPB) is currently writing rules to regulate under what conditions and when banks may charge customers overdraft fees. Yes, they are trying to get ahead of the regulations. Some banks have reduced overdraft fees, while others offer a grace period before fees are applied. For example, Chase Bank allows customers who have overdrawn their account by less than $50, up to 24 hours for customers to fund their account before applying overdraft fees starting in May 2022; Bank of America will reduce overdraft fees from $35 to $10. Check with your bank to learn about changes in overdraft fees. And that’s what’s up! Let’s talk Money Monday fundamentals on the Zoom Conversation on March 28, 2022, at 7:00 p.m. Sign up at:

Ruthven R. Phillip, Esq., is a tax attorney, Stewardship and Philanthropy Ministry Assistant, and CEO of Give2Getrich, LLC. Give2Get Rich, LLC 2022. All Rights Reserved. Any distribution or reproduction of part or all of the contents in any form is prohibited.

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