Kevin Daniels
Vice President, Main Street Financial
One Piece Of Paper You Want To Keep
Every year in the early part of March, I start getting piles of envelopes stuffed with piles of envelopes and more envelopes, each with documents still inside...it’s tax time in the US of A! I almost always hear this statement: I don’t know what to keep and what to throw away, you decide. I have even had people bring in their files and ask our staff to “clean out” their paper accumulations. We are glad to help but realize some of these clients worry about paperwork they do not understand. And quite frankly, some of it is very difficult to understand.
I have noticed that many of us, the older we get, for some reason or another become less attached to possessions and prefer simplifying life by de-accumulation, which includes the removal of excess paper. (I am not sure why, since paper takes up a relatively small amount of space in the average American household!) I admit that because of rules, legalities/liabilities, fair reporting rules and so on, there is plenty of fine print paper that falls out of an investment sponsor envelope. Much of that paper is required by law to keep you informed and can be tossed in the name of lean files. But the real issue in my mind is what NOT to throw away. Here are a few keepers: Anything that says “Important Tax Information” is a keeper, but that should be obvious, read on.
Anything that starts with the word “Form” like Form-1099, Form-1098, Form-1099 int, or Form 1099-div, or proceeds from broker and barter transactions just to name a few. Other good keepers are documents entitled “Annual Statement” or “Annual Review” as well as statements that end on December 31st. But here is the one that sneaks up on us, probably because it is not so obvious: COST BASIS DOCUMENTS. They are not labeled so clearly because the clearing firm that holds the security or the fund sponsor does not know when you will elect to liquidate your position and they often do not come at tax time. These are documents that prove how much your investment cost you and they will come in all shapes and sizes! Here is the rule, if you still own the security, then you still need the statements. The reason for this is that you have to know about your capital gains distributions and dividends as well as you partial sales and additional purchased shares.
If you sell a stock or a mutual fund this year, you (or your tax preparer) will have to tell the government what you paid for that asset, or more accurately what it has cost you since you have been the owner. How else will you know if you made a profit? Compare this to your home. If you buy a house for $175,000, and sell it for $200,000, did you make money? Not if your renovation costs were more than the difference of these two numbers. The same is true for stocks and mutual funds. You may have purchased this asset many years ago, and may have paid capital gains on many tax returns. This is said to have increased your cost basis or in other words, it has increased the amount you have put into the security. If you shred these records, you may have a difficult time determining your capital loss or capital gain. And because of that, you may pay more taxes than you really owe. Remember, the capital gain/loss is the selling price of the security or asset minus the cost basis.
So alright then, if you must throw away some paper, make sure you are especially careful about keeping paperwork on securities. These records will prove to be valuable in the future when that security is sold.
