Monthly Archives: January 2015

Tax & Home Records Checklist: What to Keep and For How Long

Unless you’re living in the 123-room Spelling Manor, you probably don’t have space to store massive amounts of tax and insurance paperwork, warranties, and repair receipts related to your home. But you’ll definitely want your paperwork at hand if you have to prove you deserved a tax deduction, file an insurance claim, or figure out if your busted oven is still under warranty.

Except for tax paperwork, there’s no official guideline governing exactly how long you have to keep most home-related documents. Lucky for you, we considered the situations in which you might need documents and came up with a handy “How Long to Keep It” home records checklist.

First, a little background on IRS rules, which informed some of our charts:

  • The IRS says you should keep tax returns and the paperwork supporting them for at least three years after you file the return — the amount of time the IRS has to audit you. So that’s how long we advise in our charts.
  • Check with your state about state income tax, though. Some make you keep tax records a really long time: In Ohio, it’s 10 years.
  • The IRS can also ask for records up to six years after a filing if they suspect someone failed to report 25% or more of his gross income. And the agency never closes the door on an audit if it suspects fraud. Just sayin’.
Document How Long to Keep It
Home sale closing documents, including HUD-1 settlement sheet As long as you own the property + 3 years
Deed to the house As long as you own the property
Builder’s warranty or service contract for new home Until the warranty period ends
Community/condo association covenants, codes, restrictions (CC&Rs) As long as you own the property
Receipts for capital improvements As long as you own the property + 3 years
Section 1031 (like-kind exchange) sale records for both your old and new properties, including HUD-1 settlement sheet As long as you own the property + 3 years
Mortgage payoff statements (certificate of satisfaction or lien release) Forever, just in case a lender says, “Hey, you still owe money.”

Why you need these docs: You use home sale closing documents, receipts for capital improvements, and like-kind exchange records to calculate and document your profit (gain) when you sell your home. Your deed and mortgage payoff statements prove you own your home and have paid off your mortgage, respectively. Your builder’s warranty or contract is important if you file a claim. And sooner or later you’ll need to check the CC&R rules in your condo or community association.

Document How Long to Keep It
Property tax payment (tax bill + canceled check or bank statement showing check was cashed) 3 years after the due date of the return showing the deduction
Year-end mortgage statements 3 years after the due date of the return showing the deduction
PMI payment (monthly bills + canceled check or bank statements showing check was cashed) 3 years after the due date of the return showing the deduction
Residential energy tax credit* receipts 3 years after the due date of the return on which the credit is claimed (including carryforwards**)

Why you need these docs: To document you’re eligible for a deduction or tax credit.

*Energy tax credits for alternative energy sources; credit expires at the end of 2016.

**Tax credits that you carry forward from one year to a future year, such as when you don’t have enough tax liability to offset the entire amount of the credit. (You can’t deduct more than you earn.) Only certain tax credits can be carried forward. Check with your tax pro about your particular circumstances.

Document How Long to Keep It
Home repair receipts Until warranty expires
Inventory of household possessions Forever (Remember to make updates.)
Homeowners insurance policies Until you receive the next year’s policy
Service contracts and warranties As long as you have the item being warrantied

Why you need these docs: To file a claim or see what your policy or warranty covers.

Document How Long to Keep It
Appraisal or valuation used to calculate depreciation As long as you own the property + 3 years
Receipts for capital expenses, such as an addition or improvements As long as you own the property + 3 years
Receipts for repairs and other expenses 3 years after the due date of the return showing the deduction
Landlord’s insurance payment receipt (canceled check or bank statement showing check was cashed) 3 years after the due date showing the deduction
Landlord’s insurance policy Until you receive the next year’s policy
Partnership or LLC agreements for real estate investments As long as the partnership or LLC exists + 7 years
Landlord insurance receipts (canceled check or bank statement showing check was cashed) 3 years after you deduct the expense

Why you need these docs: For the most part, to prove your eligibility to deduct the expense. You’ll also need receipts for capital expenditures to calculate your gain or loss when you sell the property. Landlord’s insurance and partnership agreements are important references.

Document How Long to Keep It
Wills and property trusts Until updated
Date-of-death home value record for inherited home, and any rules for heirs’ use of home As long as you own the home + 3 years
Original owners’ purchase documents (sales contract, deed) for home given to you as a gift As long as you own the home + 3 year
Divorce decree with home sale clause As long as you or spouse owns the home + 3 years
Employment records for live-in help (W-2s, W-4s, pay and benefits statements) 4 years after you make (or owe) payroll tax payments

Why you need these docs: Most are needed to calculate capital gains when you sell. Employment records help prove deductions.

Organizing Your Home Records

Because paper, such as receipts, fades with time and takes up space, consider scanning and storing your documents on a flash drive, an external hard drive, or a cloud-based remote server. Even better, save your documents to at least two of these places.

Digital copies are OK with the IRS as long as they’re identical to the originals and contain all the accurate information that was in the original receipts. You must be able to produce a hard copy if the IRS asks for one.

Tip: Tax season and year’s end are good times to purge files and toss what you no longer need; that’s often when the spirit of organization moves us.

When you do finally toss out your home-related paperwork, use a shredder. Throwing away intact documents with personal financial information puts you at risk for identity theft.




Don’t Miss These Home Tax Deductions

Owning a home can pay off at tax time.  Take advantage of these homeownership-related tax deductions and strategies to lower your tax bill:

Mortgage Interest Deduction

One of the neatest deductions itemizing homeowners can take advantage of is the mortgage interest deduction, which you claim on Schedule A. To get the mortgage interest deduction, your mortgage must be secured by your home — and your home can be a house, trailer, or boat, as long as you can sleep in it, cook in it, and it has a toilet.

Interest you pay on a mortgage of up to $1 million — or $500,000 if you’re married filing separately — is deductible when you use the loan to buy, build, or improve your home.

If you take on another mortgage (including a second mortgage, home equity loan, or home equity line of credit) to improve your home or to buy or build a second home, that counts towards the $1 million limit.

If you use loans secured by your home for other things — like sending your kid to college — you can still deduct the interest on loans up $100,000 ($50,000 for married filing separately) because your home secures the loan.

PMI and FHA Mortgage Insurance Premiums

You can deduct the cost of private mortgage insurance (PMI) as mortgage interest on Schedule A if you itemize your return. The change only applies to loans taken out in 2007 or later.

By the way, the 2014 tax season is the last for which you can claim this deduction unless Congress renews it for 2015, which may happen, but is uncertain.

What’s PMI? If you have a mortgage but didn’t put down a fairly good-sized downpayment (usually 20%), the lender requires the mortgage be insured. The premium on that insurance can be deducted, so long as your income is less than $100,000 (or $50,000 for married filing separately).

If your adjusted gross income is more than $100,000, your deduction is reduced by 10% for each $1,000 ($500 in the case of a married individual filing a separate return) that your adjusted gross income exceeds $100,000 ($50,000 in the case of a married individual filing a separate return). So, if you make $110,000 or more, you can’t claim the deduction (10% x 10 = 100%).

Besides private mortgage insurance, there’s government insurance from FHA, VA, and the Rural Housing Service. Some of those premiums are paid at closing, and deducting them is complicated. A tax adviser or tax software program can help you calculate this deduction. Also, the rules vary between the agencies.

Prepaid Interest Deduction

Prepaid interest (or points) you paid when you took out your mortgage is generally 100% deductible in the year you paid it along with other mortgage interest.

If you refinance your mortgage and use that money for home improvements, any points you pay are also deductible in the same year.

But if you refinance to get a better rate or shorten the length of your mortgage, or to use the money for something other than home improvements, such as college tuition, you’ll need to deduct the points over the life of your mortgage. Say you refi into a 10-year mortgage and pay $3,000 in points. You can deduct $300 per year for 10 years.

So what happens if you refi again down the road?

Example: Three years after your first refi, you refinance again. Using the $3,000 in points scenario above, you’ll have deducted $900 ($300 x 3 years) so far. That leaves $2,400, which you can deduct in full the year you complete your second refi. If you paid points for the new loan, the process starts again; you can deduct the points over the life of the loan.

Home mortgage interest and points are reported on Schedule A of IRS Form 1040.

Your lender will send you a Form 1098 that lists the points you paid. If not, you should be able to find the amount listed on the HUD-1 settlement sheet you got when you closed the purchase of your home or your refinance closing.

Property Tax Deduction

You can deduct on Schedule A the real estate property taxes you pay. If you have a mortgage with an escrow account, the amount of real estate property taxes you paid shows up on your annual escrow statement.

If you bought a house this year, check your HUD-1 settlement statement to see if you paid any property taxes when you closed the purchase of your house. Those taxes are deductible on Schedule A, too.

Energy-Efficiency Upgrades

If you made your home more energy efficient in 2014, you might qualify for the residential energy tax credit.

Tax credits are especially valuable because they let you offset what you owe the IRS dollar for dollar for up to 10% of the amount you spent on certain home energy-efficiency upgrades.

The credit carries a lifetime cap of $500 (less for some products), so if you’ve used it in years past, you’ll have to subtract prior tax credits from that $500 limit. Lucky for you, there’s no cap on how much you’ll save on utility bills thanks to your energy-efficiency upgrades.

Among the upgrades that might qualify for the credit:

  • Biomass stoves
  • Heating, ventilation, and air conditioning
  • Insulation
  • Roofs (metal and asphalt)
  • Water heaters (non-solar)
  • Windows, doors, and skylights

To claim the credit, file IRS Form 5695 with your return.

Vacation Home Tax Deductions

The rules on tax deductions for vacation homes are complicated. Do yourself a favor and keep good records about how and when you use your vacation home.

  • If you’re the only one using your vacation home (you don’t rent it out for more than 14 days a year), you deduct mortgage interest and real estate taxes on Schedule A.
  • Rent your vacation home out for more than 14 days and use it yourself fewer than 15 days (or 10% of total rental days, whichever is greater), and it’s treated like a rental property. Your expenses are deducted on Schedule E.
  • Rent your home for part of the year and use it yourself for more than the greater of 14 days or 10% of the days you rent it and you have to keep track of income, expenses, and allocate them based on how often you used and how often you rented the house.

Homebuyer Tax Credit

This isn’t a deduction, but it’s important to keep track of if you claimed it in 2008.

There were federal first-time homebuyer tax credits in 2008, 2009, and 2010.

If you claimed the homebuyer tax credit for a purchase made after April 8, 2008, and before Jan. 1, 2009, you must repay 1/15th of the credit over 15 years, with no interest.

The IRS has a tool you can use to help figure out what you owe each year until it’s paid off. Or if the home stops being your main home, you may need to add the remaining unpaid credit amount to your income tax on your next tax return.

Generally, you don’t have to pay back the credit if you bought your home in 2009, 2010, or early 2011. The exception: You have to repay the full credit amount if you sold your house or stopped using it as primary residence within 36 months of the purchase date. Then you must repay it with your tax return for the year the home stopped being your principal residence.

The repayment rules are less rigorous for uniformed service members, Foreign Service workers, and intelligence community workers who got sent on extended duty at least 50 miles from their principal residence.



Make More Money by Avoiding These 13 Revenue Sinkholes

Here’s some good news for entrepreneurs: You are wealthier than you think.

Indeed, even if your top line revenues were to stay flat for the next few years, there are ways to make significant advances to your bottom line growth with some simple, if not occasionally controversial, concrete steps.

Think about it for a moment. You can make yourself wealthier , beginning today, without working any harder, taking any additional risks, trimming any lifestyle expenditures or learning any new systems of investing.

Here’s the best part: It’s your money. You’ve already generated this income, but until now, you’ve let stacks of it escape out the door, unchallenged. As you read each of these 13 item, ask yourself if you’re unknowingly stepping in a financial sinkhole and make a mental checkmark.

1. Credit scores.

“I don’t monitor my credit score at least semi-annually and take proactive steps to raise it – and I assume there are no “errors” on the reports.”

CBS News recently reported that 40 million Americans have an error on their credit report, with half of these errors significantly lowering the innocent person’s credit score, sometimes by as much as 50 points.

So even if you’ve always paid your bills on time, your credit score could be costing you thousands of dollars annually.

Raising your score by as few as 50 to 100 points (which is faster and easier than you may think), can help you refinance debt to lower interest rates, reduce many insurance premiums and possibly even save you thousands in closing costs when buying a home. (A one point credit score difference– such as a 719 instead of a 720– could cost you as much as $4,500 extra if it means you don’t qualify for a conventional loan and must get an FHA loan instead.)

2. Not all expenses are equal.

“I don’t distinguish between expenses that are productive, consumptive and destructive.”

“Expense” is a word that gives most people a negative feeling. We’re taught to avoid expenses. But this naive attitude won’t grow your business and it won’t enhance your life.

The truth is, the only type of expense that should give you a negative feeling are destructive expenses. Overdraft fees, using credit to consume, spending on vices, products or services you don’t use or that don’t add to your life, are all are expenses that should be cut out entirely.

Productive or rainmaking expenses, however, are how you make money. Spending more money on the right employee, the right equipment, the right marketing campaign or the right mastermind group can pay for itself over and over again.

If spending $1 on a productive expense makes you $2, then you shouldn’t stop spending until that well runs dry.

Lastly, consumptive expenses are important, too. Vacations, dining out, special experiences with your family, these have the power to rejuvenate you and help you to be more productive. They’re also the reason you work so hard in the first place.

The only caveat is that a consumptive or lifestyle expense must be managed well, which generally means paying for them in cash.

3. Investment advisors.

“I rely on one or more investment advisors who are compensated, at least in part, based upon sales commissions.”

The retirement planner’s #1 interest, because of the way they get paid, is to get your assets under management and keep them there. They’ll always tell you to keep funding your retirement accounts, even when a bigger picture of your finances suggests otherwise.

For example, if you’re paying higher interest on a loan than the interest you’re earning on an investment, the wise move is to pay off the loan before adding any more money to the investment. It may even be wise to completely cash out the investment to pay off the loan.

But the financial advisor rarely looks at the big picture. They will always ask for more cash. That may mean taking money away from your business or from paying off high interest rate loans, and instead, putting them in underperforming investments that you don’t know or understand, that don’t provide cash flow today and that harm your ability to be more productive as a business owner.

4. Taxes.

“I meet no more than once or twice a year with my tax preparer.”

We find 93 percent of business owners are overpaying on their taxes, and the number one culprit is not being proactive about meeting with their tax preparers.

January to April, when most people visit their accountant, is a difficult season for tax-preparers to think productively about your tax strategy because they’re inundated with filing returns. Even worse, if you didn’t prepare your tax strategy before January, there’s not very much they can do besides deferring your taxes by putting it in a retirement plan. (Which by the way, may mean paying more taxes later if tax rates go up or you’re making more money.)

If you meet with your tax preparer between mid-April and December, it’s easier to get better service. They can make sure you’re taking all of your deductions and maximizing your savings.

5. The structure of your business.

“I have not reviewed my business structure (LLC, S Corp, Unincorporated, etc.), with a qualified legal and tax advisor in the past three years.”

Far too often business owners don’t incorporate because they think it’s too complicated and their accountant says not to. But by not incorporating, you’re exposing yourself to more liability and could end up overpaying on your taxes.

The truth is, corporate structure can be outside the expertise of your tax accountant. So you’ll want to meet with a legal professional who specifically understands corporate structures at least once every three years to make sure you’re getting all the savings and tax deductions you can.

6. Business loans.

“I have outstanding business loans.”

Many (if not most) entrepreneurs spill away profits on poorly structured loans and repayment strategies more than on any other oversight.

Entrepreneurs should choreograph loans in a way that reduces the cost of borrowing, to free up cash for better uses, to save on taxes and to flip what most people perceive as a liability into a productive asset.

This is especially true if you took out any loans when you had less cash flow, a lower credit score or inadequate collateral. By restructuring these loans, you can save a lot of money. Or sometimes you can even consolidate loans to lower your interest rate, lower your minimum payments and thus increase your cash flow.

7. Personal loans.

“I am carrying one or more loans. For example: car loans, credit cards, mortgages on your home or your office.”

When you have multiple assets each with their own loan, the interest rates you’re paying will vary based on the asset class. By refinancing and combining loans, many times you can lower those interest rates. And many times you can also lengthen the term of the loan, which lowers your monthly payment and increases your monthly cash flow.

Then another bonus comes when you take a loan where the interest is not tax-deductible, and refinance it into a loan that is tax-deductible like a mortgage. This way even the government is supporting you in paying off your loan.

8. Monthly payments.

“I regularly pay more than the monthly minimum on more than one credit line (business or personal).”

Far too often, people take a shotgun approach to loans, trying to pay them down all at once. Or maybe they have some extra money, so they pay a little extra to whatever bill happens to be due.

But as a business owner, it’s really important to free up cash flow fast. So instead of taking that shotgun approach, it’s better to use a focused, deliberate, intentional methodology to choose one loan to pay off first.

A focused approach, where you pay extra to the least efficient loan that can be paid off the fastest, will improve your debt to income ratio, increase your cash flow and actually improve your credit. This allows you to qualify for lower interest rates on every other loan, saving you even more money.

9. Investments

“I have money riding on investments that I am not specifically trained to manage, including stocks, mutual funds, or income real estate.”

If you don’t know how you’re earning interest, then who is truly managing your money, and how do you know they’re not just selling you investments that make them a commission? If you don’t know what the fees are, how the investment benefits you now and in the future, what the exit strategy is, or how it can turn into cash flow, then it’s a lot more like gambling than investing.

The best way to invest is to leverage your instincts by staying closer to home with your money. That means only invest in what you know, because everything else involves too much risk.

You see, risk isn’t in the investment, it’s in the investor and how they relate to the investment. For some people real estate is a good investment, and for some people it’s absolutely atrocious. A small number of people understand the stock market clearly, and that can be a great place for them to invest their money. But for most business owners, the thing they understand best is their business, which makes it the best place to invest.

10. Sharing with employees.

“I provide my employees a profit-sharing/defined-benefit plan.”

The first question to ask yourself is, are you providing this profit-sharing plan because you truly want to benefit the employee, or were you sold that it’s a tax advantage? Because if that was compensation you weren’t planning on giving them, you’ve increased your expenses in the name of saving tax. You should never let the tax-tail wag the dog.

But the worst part about a profit sharing plan, is if it doesn’t perform, many times you have to add additional cash to guarantee the future benefit to your employee. That’s a big concern.

If you have one of these, congratulations on being willing to save tax now (that will have to be paid later), but it’s time to start running for the hills because these things are scary and full of problems.

11. 401k plans.

“My spouse and/or I contribute to a 401(k) plan.”

Most people contribute to a 401(k) to grow their savings tax free, but it may end up costing you more money than you save.

Yes, you save on taxes today, but you’ll have to pay taxes when you withdraw the money. All signs indicate that taxes are going up, not down. If you hate paying taxes today, you’re probably going to hate paying in the future.

In my NYT bestselling book, Killing Sacred Cows, I warn people of the 15 major problems of the 401(k), including: you’re not the owner but only the beneficiary of your 401(k), the government can change the rules at any time, you can’t get to the money until 59 1/2, and the fees are typically much higher than most investments out there because you’ve added complexity and layers of administration and legal fees.

A 401(k) is like having a bunch of dishes in one sink, moving the dishes to another sink so someone (the IRS) can’t see them for now, but eventually the dishes still have to be done. The longer you wait, the bigger the mess, the more the mold grows, the more the stench repels.

12. Savings.

“I have saved enough money to elevate my style of living or to fund a long-held dream — such as a special vacation, a boat, or a collectible — but I’m postponing any such expenses until I retire or am closer to retirement age.”

As an entrepreneur, you are your greatest asset. Your ability to produce is going to give you the greatest return. But if you don’t take time away to enjoy life, and you’re always just saving and running on the hamster wheel to try to get ahead, eventually you’re going to have a phenomenon called diminishing marginal productivity. You simply won’t be able to produce at your highest level.

If you can take small trips along the way rather than just wait for retirement, you can enjoy what life has to offer, and the people in your business will pick up the slack and learn how to do things without you. This empowers your employees and ultimately improves your business results, all while you get to actually enjoy life more along the way.

I once went through a program where they convinced me to take more time off. As counterintuitive as it was, I took twice as many days off one year, and increased my revenue $170,000.

Part of it was that I came back more creative, and part of it was that I became more strategic about what to handle myself and what to delegate.

13. The thrill is gone.

“I have lost some of my passion or sense of purpose when it comes to work.”

Many business owners lose passion because they have too many details, tasks and decisions running through them, which takes time away from the tasks that energize them.

If you build a team and infrastructure that supports you in doing the things that you’re not only best at, but that also give you more energy, you’ll increase your results, your energy and your passion.

Remember, you’re the asset, and if you exhaust yourself to the point of no enjoyment, then you won’t have the passion to push forward past the inevitable obstacles every entrepreneur faces–and it will cost you money.

There is no point value or weighting assigned to these leakages, so you don’t need to tally your answers — even one checkmark is cause to make a change. Because each and every leak listed above is enough, by itself, to send your hard-earned profits spiraling into the financial abyss.

(Yes, I realize some of these leaks are highly controversial)

But the good news is that the more items you mentally checked on “The Baker’s Dozen,” the greater the likelihood you can quickly make yourself significantly wealthier without generating a single additional dollar in sales.

After all, it’s your money: you should keep more, grow more, and enjoy more.



Be Warned: IRS Scams On The Rise

An IRS telephone scam has reached unprecedented levels, state and federal officials said, but catching the perpetrators will be difficult.

So North Carolina’s top prosecutors issued this warning: If someone calls claiming to be with the IRS, hang up.

The scheme has cost 225,000 consumers nationwide more than $11 million since October 2013, including 22 people in North Carolina who lost a combined $100,000.

“There is a sharp spike in this scam right now,” Attorney General Roy Cooper said. “It’s very difficult to catch them. They can be scamming you in Charlotte … and be halfway around the world.”

Some scams – such as the you’ve-won-the-lottery scam – prey on people’s greed, said Tom Bartholomy, president of Better Business Bureau of Southern Piedmont. Charity scams prey on people’s compassion.

The IRS scam, he said, preys on their fear.

Cooper explained what happens when you get a phone call: “Your caller ID says it’s from the IRS. Someone who is very authoritative says you owe federal taxes and need to pay them now.”

If you don’t comply, he said, your phone may ring again. This time, caller ID says it’s the local sheriff or police. “They tell you you are going to be arrested.”

The BBB has received as many as 10 complaints about the scam every day over the past several weeks, twice as many as any other scam in 2014. “It is No. 1 on our hit list,” Bartholomy said.

U.S. Attorney Anne Tompkins outlined several other telemarketing scams that have been successfully prosecuted. But she said catching the IRS fraudsters will be “very difficult.” Tompkins declined to provide details about the investigation.

Bikram Bandy, who coordinates the Federal Trade Commission’s Do Not Call Program, previously told the Observer that the scheme is operating out of a rogue call center in India. He said investigators here are working with investigators there.

Report suspicious calls
The Rev. Al Cadenhead, senior pastor at Providence Baptist Church, was duped out of $16,500. As foolish as he believes it makes him look, Cadenhead told the Observer in October and continues to speak out publicly in the hope of preventing others from being taken in, too.

A caller who pretended to be an IRS agent persuaded Cadenhead to borrow the money from his bank and drive to eight Rite Aid stores to purchase Green Dot MoneyPak prepaid debit cards. He then got Cadenhead to read the PINs on the cards, which enabled the impersonator to collect the money.

Former Carolina Panther Frank Garcia was scammed out of $8,000 the same way.

“They knew just one intimate detail after another,” Cadenhead said at Friday’s news conference. “They scare you to death.”

Asked whether someone within the IRS could be feeding the scam artists information, Melissa Chedotal, a special agent in charge with the Treasury Inspector General for Tax Administration, said the agency is investigating whether there is any “internal fraud,” among other things.

But Chedotal and other officials emphasized that all sorts of information about people can easily be culled from the Internet. The callers, Tompkins said, know just enough to sound legitimate. They may know your address. Or the last four digits of your Social Security number.

A technology called Voice Over Internet Protocol allows them to place calls cheaply over the Internet from anywhere in the world. They use Internet software that makes it appear they’re calling from the IRS or another government agency. They insist on payment by prepaid debit cards because they’re difficult to trace.

If you get a call, go to to report the scam. You also can report it to TIGTA at 800-366-4484, the N.C. Attorney General’s Office at 877-5-NO-SCAM (877-566-7226) and the BBB at 704-927-8611.

And then do this: Warn your friends.