By Susan E. S. Howe, CPA | Howe Advisory

Every household should have a “tax permanent file.” In CPA lingo, a permanent file is a running record of information that should never be purged or lost. A tax permanent file would be the tax equivalent to the documents you secure in a safe deposit box or keep in a special file – things like wills, Social Security cards, and deeds.

So what should be in the tax permanent file?

Much of what needs to be retained in this file pertains to basis, or the cost and/or value of items that if sold would be reportable on a tax return. For most of us, ownership of real estate and investments in stocks, bonds, or partnership interests are the primary source of potential gains that might attract tax.

For real estate, basis is generally the acquisition price plus costs of acquisition, but it also includes capital improvements such as renovations, a new roof, or new major appliances that will stay with the house when sold. It’s a good idea to keep documentation and a running total of these things so that you know your basis when it’s time to sell the house. In the case of a second home or rental property any gain will be taxable, so every dollar of documented basis will reduce that gain. Even in the case of a principal residence, if the house is sold for more than $500,000 over its purchase price there could be taxable gain, so basis is important.

In the case of stocks or bonds – especially if your current broker was not involved in the purchase or if you inherited the investment – you should have documentation of the purchase price or the value at the date inherited. In the case of very old stock that may have split or been reissued through acquisition or merger, this can be a complicated tracking exercise, so good recordkeeping is key.

In the case of a partnership interest, your basis is affected by the capital or money invested, plus income or losses reported on each year’s tax return. This is a case where you may need to keep tax returns for longer than the statutory audit window.

Another, often overlooked basis item is for nondeductible traditional IRAs. If you contribute money to a non-Roth IRA and there is no deduction allowed because of income level or retirement plans at your employment, you should only pay tax on the growth of these funds when you ultimately withdraw from the IRA. This is contrasted with a withdrawal from a 401(k), where you pay tax on the gross amount reported on the Form 1099R because 100 percent of the contribution was deducted from your taxable wages. This basis is tracked on Form 8606, so it’s critical to maintain a copy of these forms in your permanent file.

Keeping a good tax permanent file may not only help save you taxes, but it can also help you keep your tax return preparation fees down, because handing your CPA a well-organized basis work paper will no doubt reduce his or her time in preparing your tax return. That’s a great payoff for the time you invest in maintaining these records.

Susan E. S. Howe, CPA, is principal of Howe Advisory in Strafford, Pa.