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Spring Cleaning

It's that time of the year the snow has FINALLY melted, the birds are starting to sing, and you are drowning in paper. Spring is here and it's tempting to get with the program and do a little spring cleaning. Sounds good to me but before you haul all of your old financial records to the curb take a moment to read this article.

Save or toss

It is a good idea to keep copies of your filed tax returns. They help in preparing future tax returns and making calculations if you file an amended return.

The general rule of thumb is to keep your financial records that support an item of income or deduction on a tax return until the statute of limitations for that return runs out.

The magic number is three. Why three? Three years is the statute of limitations for tax audits at the IRS. That means that with April 15th, 2011, past the IRS can no longer audit you for your 2007 tax return. Before you turn your old tax returns into confetti remember that the period of limitations is the period of time in which you can amend your tax return to claim a credit or refund, or that the IRS can assess additional tax.

Things to keep longer

You should keep any records on appreciable assets that you currently own since one day in the future you may decide to sell them and will need this documentation to determine that you pay the right amount of tax. This would be any bling that you bought as well as stocks, bonds, antiques, real estate, and land. Also, keep any records on home improvements that you have made. It adds to your basis. The records will help you determine any depreciation, amortization, or depletion deduction as well as the gain or loss when you sell or otherwise rid yourself of the property.

If you swap properties with someone else in a nontaxable exchange, you got it--keep both the records on the old property, as well as on the new property, until the period of limitations expires for the year in which you dispose of the new property in a taxable disposition.

What if you œforget to report income (and it is more than 25 percent of the gross income shown on your return)? Yup, you may œforget to pay your taxes but don't forget to keep the documentation. The IRS can go back up to six years.

You file a claim for credit or refund after you file your return; keep records for three years from the date you filed your original return or two years from the date you paid the tax, whichever is later.

For a loss claim from worthless securities or bad debt deduction; keep records for seven years. All employment tax records should be kept for at least four years after the date that the tax becomes due or is paid, whichever is later.

Remember while the IRS may say it is ok to dispose of some paperwork another financial institution such as your insurance company or creditors may want you to keep the papers longer. Check. It's easier to file your records than to try to recreate them from scratch.