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WHICH TAX RECORDS TO SAVE?
JULY 2001

When it come to keeping tax records, there two types of people: paranoid pack rats and determined dumpers. Which are you? It doesn’t matter to the IRS. The tax agency holds everyone to the same recordkeeping standards at audit time. Those old records can help you collect a future refund if you file an amended return. Because it is difficult to know what to save and what to pitch, here’s a quick guide.

General rule. Many tax advisers recommend that you keep copies of your finished tax returns forever. At the very least, you should hang onto them for three years after the date they are due or filed, whichever is later. Hold onto all receipts, canceled checks, credit card statements and other items that substantiate the returns for the same time.
In most cases, the IRS can audit your return during the three-year statute of limitations. You can also file an emended return on Form 1040X during this period and collect a refund if you discover you missed a deduction, overstated your income or overlooked a credit.

Exceptions. In some situations, the statute of limitations is extended. Example: The IRS has up to six years to audit if you understate your income by more than 25%. And the IRS can come after you any time if fraud is involved or you don’t file a tax return at all.
But there are also cases when taxpayers get more than the usual three years for their own purposes. For example, you have up to seven years to amend a return to claim deductions for bad debts or worthless securities, so don’t toss out any records that could result in refunds.
In addition, keep the following records for longer than the normal time period:

Investment statements. Save information about stocks, bonds and other investments for as long as you own them, plus three years.
To calculate capital gains or losses, you need figures from these statements that show the purchase date, price, commissions paid to brokers and any dividend reinvestment. If you invest in limited partnerships or “passive activities, you should also retain related records until you sell, plus three years.

Individual retirement accounts. The IRS requires you to keep copies of Forms 8606, 5498 and 1099 R until all money is withdrawn from your IRAs. Since the introduction of Roth IRAs, it’s more important than ever to hold onto, all records pertaining to IRA contributions and withdrawals in case you’re ever questioned.

Multiple year write-offs. Save any proof of deductions taken over more than 1 year. Whenever you carry over excess write-offs to future years because they can’t be deducted currently, you need to retain the related records longer.


5 COLLEGE FUNDING TACTICS FOR PROCRASTINATORS

Did your toddler somehow turn into a teen overnight? If so, you may be joining the millions of other parents who haven’t put aside enough for college.
If you’re wondering where to turn as the clock ticks toward tuition day, here are five sources that won’t hurt your tax situation:

1. Tap into home equity. As you know, you can generally borrow up to $100,000 and deduct the interest. This privilege is available even if your income is too high to qualify for the new college loan interest write-off. However, you can’t deduct interest on loans in excess of the value of your home or other mortgage debt.
You can, however, take out a home equity loan against a vacation property, if you meet the guidelines. Keep in mind: If you’re subject to the alternative minimum tax, that home equity interest is not deductible.

2. Borrow against your qualified retirement plan account. When possible, this is better than taking outright withdrawals. You can generally borrow 50 percent of your vested account balance, up to $50,000.
As you repay the loan, your account is restored, with your tax deferral advantages intact. Unfortunately, partners and S corporation shareholder-employees cannot borrow against retirement accounts.

3. Take withdrawals from a traditional IRA. As long as you use the money for higher education expenses for your children or grandchildren you won’t be hit with the 10% penalty tax that generally applies when payouts are taken before age 591/2.
But you still owe income tax.

4. Take withdrawals from your Roth IRA. You can always withdraw your contributions tax and penalty free. However, if you made a 1998 Roth conversion and are using the four-year spread privilege for the taxable income, a pre-2001 withdrawal accelerates your deferred tax bill.

5. Borrow from grandparents or other relatives. Maybe you can arrange a loan. The rules for interest free loans over $10,000 are complicated, but the results are usually acceptable for the borrower and lender when the amount is under $100,000 and payable on demand (RR 8/3/98). You can agree informally on any payment schedule.
There are no tax problems with interest-free borrowing as long as the outstanding loans between you and the lender total less than $10,000.

Q&A CORNER

Q. Our nonexempt employees currently work from 8:00 am to 5:00 pm with an unpaid hour off for lunch between noon and 1:00. They’ve requested to be allowed instead to take two 15 minute breaks, one in the morning and one in the afternoon, and compensate by only taking 30 minutes for lunch. Because it would be shorter, would that time become compensable?
A. The courts have interpreted the Fair Labor Standards Act in such a way that 30 uninterrupted minutes is regarded as sufficient to render a meal period noncompensable. Shorter breaks of up to about 20 minutes are defined as “rest periods” however, and that time is compensable under FLSA. So your 15-minute morning and afternoon breaks would be paid time even if no work were performed, although the 30 minute lunch break would be noncompensable. Be particularly careful in this situation, because adding a daily half hour of compensable break time to your employees’ normal 40 hour week would make that additional 2 1/2 hours overtime and require that it be paid at time and one half the employees’ regular rates.