August 2011 Archives - The Military Wallet

How Long to Keep Tax Returns and Financial Records

Though we’re months away from tax season, it’s a great time to start thinking about how to organize your financial records. What makes tax time so stressful for many people is the fact that they have to do a lot of record keeping in a short amount of time. Instead of procrastinating, get a head start now so you can relieve a ton of stress and make filing your tax return much easier and faster.

Why Should You Keep Financial Records?

How long should you keep financial records?

We typically need to keep fewer records than we do. However, if you understand why you need to keep certain records in the first place, that will help you determine what to keep and what to toss.

Here are 6 reasons why you need to keep records:

1. Identify your sources of income. If you receive income from a variety of sources, having complete records will help you separate business income from non-business income or taxable from non-taxable income.

2. Make an insurance claim. It’s a good idea to keep receipts for large purchases—like jewelry, appliances, electronics, and sporting goods—in the event you need to prove the original purchase price to an insurer or to make a warranty claim.

3. Get a loan. When you apply for a large loan to purchase a home or business, for instance, you must produce several years’ worth of income, banking records, and more.

4. Keep track of your property basis. You need to keep records that show the basis, or cost, of your home so you know if there is a gain or loss when you sell it. The adjusted basis includes the original purchase price plus the cost of any improvements you’ve made to the property. You also need this information to figure depreciation if you rent out part of your home or use it for business purposes. See Publication 530, Tax Information for Homeowners and Publication 551, Basis of Assets for complete details.

5. Keep track of investment gains and losses. You need to keep records that allow you to determine your basis in an investment (such as stocks, bonds, mutual funds, and exchange-traded funds), so you know if there is a gain or loss when you sell it. See Publication 550, Investment Income and Expenses for more information.

6. Support information you submit on your tax return. If you were ever audited by the IRS, you’d be very happy to have all the documents that back up the tax return in question. Taxpayers are responsible for what’s submitted on their tax return—even if it was prepared by an accountant. Being able to quickly produce back up documents for income, tax deductions, and tax credits, can help you avoid having to pay additional tax and penalties.

What Financial Records Should You Keep?

Now that you know the reasons why records are important, here’s a list of basic financial documents you should keep related to your income, expenses, home, and investments:

Form W-2
Form 1099
Form K-1
Bank statements
Brokerage statements
Receipts that document tax deductions or credits (such as charitable contributions, mortgage interest, real estate taxes, child care, and medical expenses—for a complete list refer to Publication 552, Recordkeeping for Individuals)
Credit card statements that contain tax-related transactions
Auto mileage logs
Real estate closing statements
Receipts that document substantial home improvements
Insurance records
Retirement account information

I recommend that you attach all tax-related paperwork to your tax return each year and file it away in a legal-size clasp envelope that’s clearly labeled with the tax year.

Having tax returns on hand can help you (or your accountant) prepare future returns. Additionally, in the event of your death tax return copies would greatly assist the administrator of your estate.

How Long Should You Keep Financial Records?

Since you can amend a tax return for up to 3 years or be audited for up to 6 years (in some cases), most people say that’s enough time to hang on to them. However, I recommend you keep old tax returns forever and here’s why: The IRS says, “You must keep your records as long as they may be needed for the administration of any provision of the Internal Revenue Code. “Any provision” of the IRC is pretty broad!

Additionally, the IRS recommends that you keep a copy of every W-2 you receive in your lifetime until you begin receiving Social Security retirement income. Those forms would be the only way to confirm your earnings in a particular year and reconcile an error in your benefits.

Instead of pulling out W-2 forms and keeping them in a separate file, it’s just easier to save your entire tax return. Yes, it takes up more space in your filing cabinet or attic, but for me keeping the full backup is worth it.

Use an Easy Recordkeeping System

I created a step-by-step video that shows you exactly how I organize my personal records. When you sign up at SmartMovesToGrowRich.com it’s one of several information gifts you receive. You’ll also get 2 free chapters from my award-winning book, Money Girl’s Smart Moves to Grow Rich, which is an easy-to-understand guide to personal finance.

Being stress-free at tax time—while everyone else is rushing around—is a great feeling! So take a little time to get organized now and set up a system that will keep you level-headed about taxes for decades to come.

by Emily Guy Birken

Avoid Credit Card Problems While Traveling Abroad

You would think that dealing with money while traveling abroad would no longer be a big deal in 2011. After all, in the modern world, there’s no more need for traveler’s checks or cash hidey-holes stitched into your clothing. Just a quick swipe of a credit card, and you’re ready to go. Unfortunately, the magic of credit cards does not necessarily mean that your trip abroad will be smooth sailing. Here are some of the unexpected pitfalls you may encounter when traveling overseas with your credit card—and how to deal with them:

Avoid credit card problems while traveling abroad

1. Having your card shut down. If you neglect to mention to your credit card issuer that you will be traveling, that can sometimes flag your foreign purchases as suspicious activity. If you’ve ever had unauthorized charges on your card, you know that your credit card company will contact you to determine if the suspicious charges are legit or not. If you’re out of the country, the issuer will not be able to reach you through the normal channels and will assume someone has stolen your card, leaving you with a useless square of plastic in the middle of a charming village on the Mediterranean.

The Solution: Call your credit card issuer’s customer service line to give them a head’s up a few weeks before your trip.

2. High international transaction fees. Some credit cards make out like bandits on international transactions, where they charge “currency conversion fees.” These fees are generally a percentage of the dollar amount (meaning the cost in foreign currency is converted by the credit card company). What makes these fees really insidious is the fact that both the credit card company (think Visa or MasterCard) and the issuing bank charge their own separate fee.

The Solution: Find out ahead of time how much you will be charged for your purchases on vacation. Some credit card companies, including Capital One and certain American Express cards, have no international transaction fees.

3. American cards might not work at all in Europe. All American credit and debit cards rely on magnetic stripes in order to process information. Unfortunately for American travelers in Europe, the old country has almost universally switched over to microchip technology, meaning your cards could be useless. While MasterCard and Visa require all merchants to accept their magnetic-stripe cards, sometimes cashiers (and unmanned pay kiosks) are unable or unwilling to accept your American plastic.

The Solution: Travelex offers a preloaded MasterCard debit card that features the microchip technology accepted all over Europe. This is a great card to carry with you for the instances when your card isn’t accepted—but don’t let it be your only way to pay. While there is no fee for using the card, the exchange rate for loading it with foreign currency isn’t great.

4. Identity theft. As much of a nightmare this might be while you’re home, it’s that much more difficult to deal with while abroad. Though European countries do not have a great deal of crime, pickpocketing is rampant. So it’s important to keep your wallet and credit cards in a difficult-to-reach pocket in crowds and be vigilant when you are using the cards.

The Solution: The best way to deal with theft of credit cards abroad is to cancel them as soon as possible. So make sure you write down your account number and card issuer’s contact information and place it all in a safe spot (like a discreet pocket in your luggage).

A little planning ahead can ensure that using your credit card will be the safest and most convenient way to pay while you’re abroad.

by Ryan Guina

Navy Federal Credit Union’s cashRewards Card Review

The cashRewards card from Navy Federal is one of their most popular rewards cards, and for good reason. It’s simple and straightforward, offering cash back that racks up with every purchase. And unlike most reward cards, cashRewards honors all transactions, so even if you’re buying a soda down the street, you’re earning up to 1.5% cash back on every purchase.

Too good to be true? Usually; but not this time. Because Navy Federal is a not-for-profit credit union, they don’t have demanding stockholders to appease, so instead, they can stay focused on their members. It’s no wonder that Navy Federal shines in its member-service reviews and lives up to its no-strings-attached reputation. In addition to leaving their members well-served, this card offers several advantages, including some of my favorites:

Low rates that never exceed 18%
Cash rewards that never expire
No caps on the amount you earn
No annual fee

Not to mention, you can start redeeming for your cash back when you’ve earned as little as $20. I highly recommend this card for its excellent perks. Apply now for the Navy Federal cashRewards card. Click Here.

by Laura Adams

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What You Should Know About Debt Forgiveness

If you can’t pay your mortgage or credit card debt, you’ve probably wondered what happens if a lender cancels or forgives your debt. It’s important to understand that if you owe a debt that is officially cancelled or forgiven, it may be taxable.

What Forgiven Debt Is Taxable?

In general, if you borrow money from a lender and they cancel all or a portion of it, you must add the cancelled amount to your income and pay tax on it. For example, let’s say you have a $25,000 credit card balance that you can’t pay because you lost your job. After several months, the card company offers to reduce your debt to $15,000 if you pay $5,000 a month for three months. If you accept that deal and pay up, they cancel the remaining $10,000 balance. But that’s not the end of the story.

Why Is Forgiven Debt Taxable?

When a lender cancels debt in excess of $600, they must report it to the IRS on Form 1099-C, Cancellation of Debt and send you a copy at the end of the tax year. Receiving this form is a nightmare for many people who didn’t know that most cancelled debt is taxable.

Here’s why you have to pay tax on most forgiven debt: When you borrow money or make a charge on a credit card, you get to use that money without paying tax on it, because the understanding is that you’re going to pay it back. But when you no longer have an obligation to pay it back (because the lender forgives the debt), you have just received income from the lender.

What is the Mortgage Forgiveness Debt Relief Act of 2007?

The good news is that there are important exceptions to the tax rule that I’m going to cover. The first one is the Mortgage Forgiveness Debt Relief Act. This legislation was created in response to the real estate meltdown and mortgage crisis, so the IRS doesn’t kick a man when he’s down! After all, if you can’t afford your house, how in the world could you turn around and pay a massive tax bill at the end of the year?

This regulation allows you to exclude any debt from taxes that’s forgiven on your main home–but not on a second home, a rental property, or a business property. Nor can you exclude forgiven debt for any other type of loan or credit card under this law.

The debt forgiveness relief applies no matter if the mortgage debt is cancelled due to a short sale (where proceeds don’t cover the mortgage balance), bankruptcy, or due to a mortgage modification. The regulation shelters up to $2 million of qualified debt from taxation (or up to $1 million if you’re married and file taxes separately). The debt must have been used to buy, build, or improve your main home and be secured by it. If your mortgage debt was refinanced, it can be a little tricky because it’s eligible for the tax exclusion, but only up to the amount of the previous mortgage principal balance.

It’s great to have debt forgiveness regulations in place that help struggling homeowners; however, the tax benefit of the Mortgage Forgiveness Debt Relief Act only extends through 2012.

Bankruptcy and Forgiven Debt

The second major exception to the rule about the taxation of forgiven debt applies to Title 11 bankruptcy proceedings. No debts that are discharged through bankruptcy are considered taxable income. Read more about how your debts are treated in bankruptcy.

Insolvency and Forgiven Debt

The third exception to taxation on forgiven debt comes into play if you’re insolvent, which means that the total amount of your debt exceeds the fair market value of your total assets. Your assets include everything you own, such as a car, furniture, life insurance policies, investments, and retirement accounts. If you can prove that you were insolvent immediately before a debt was cancelled,—such as an auto loan, student loan, or credit card—some or all of it may not be taxable.

This isn’t a complete list of debts that can escape taxation when forgiven, so be sure to refer to IRS Publication 4681 for more information. The publication contains a worksheet you can use to figure out whether you qualify for insolvency. If you have forgiven debt that’s not taxable, you still have to report it to the IRS by completing a few lines on Form 982 and attaching it to your tax return.

How to Prepare for Taxes on Forgiven Debt

If you have a forgiven debt that is taxable, it’s a good idea to meet with a tax accountant so they can review your financial situation and estimate your tax liability. You may not like what they tell you, but at least you can start planning for an unusually large tax bill. Consider creating a savings plan or adjusting your withholding at work to offset an upcoming tax liability.

In chapter 10 of my award-winning book, Money Girl’s Smart Moves to Grow Rich, you’ll find more information about taxes and get tips to choose the right tax professional for your situation.