MONEY Ask the Expert

Why a High Income Can Make It Harder to Save for Retirement

Ask the Expert Retirement illustration
Robert A. Di Ieso, Jr.

Q: My employer’s 401(k) plan considers me a “highly compensated” employee and caps my contribution at a measly 5%. I know I am not saving enough for retirement. What are the best options to maximize my retirement savings? I earn $135,000 a year and my wife makes $53,000. – Eric Ober, Long Island, NY

A: It’s great to have a six-figure income. But, ironically, under IRS rules, being a highly compensated worker can make it harder to save in your 401(k).

First, some background on what it means to be highly compensated. The general rule is that workers can put away $18,000 a year in pre-tax income in a 401(k) plan. But if you earn more than $120,000 a year, or own more than a 5% stake in your employer’s company, or are in the top 20% of earners at your firm, you are considered a “highly compensated employee” (HCE) by the IRS.

As an HCE, you’re in a different category. Uncle Sam doesn’t want the tax breaks offered by 401(k)s only to be enjoyed by top executives. So your contributions can be limited if not enough lower-paid workers contribute to the plan. The IRS conducts annual “non-discrimination” tests to make sure high earners aren’t contributing disproportionately more. In your case, it means you can put away only about $6,000 into your plan.

Granted, $120,000, or $135,00, is far from a CEO-level salary these days. And if you live in a high-cost area like New York City, your income is probably stretched. Being limited by your 401(k) only makes it more difficult to build financial security.

There are ways around your company’s plan limits, though neither is easy or, frankly, realistic, says Craig Eissler, a certified financial planner with Halbert Hargrove in Houston. Your company could set up what it known as a safe harbor plan, which would allow them to sidestep the IRS rules, but that would mean getting your employer to kick in more money for contributions. Or you could lobby your lower-paid co-workers to contribute more to the plan, which would allow higher-paid employees to save more too. Not too likely.

Better to focus on other options for pumping up your retirement savings, says Eissler. For starters, the highly compensated limits don’t apply to catch-up contributions, so if you are over 50, you can put another $6,000 a year in your 401(k). Also, if your wife is eligible for a 401(k) or other retirement savings plan through her employer, she should max it out. If she doesn’t have a 401(k), she can contribute to a deductible IRA and get a tax break—for 2015, she can contribute as much as $5,500, or $6,500 if she is over 50.

You can also contribute to an IRA, though you don’t qualify for a full tax deduction. That’s because you have a 401(k) and a combined income of $188,000. Couples who have more than $118,000 a year in modified adjusted gross income and at least one spouse with an employer retirement plan aren’t eligible for the tax break.

Instead, consider opting for a Roth IRA, says Eissler. In a Roth, you contribute after-tax dollars, but your money will grow tax-free; withdrawals will also be tax-free if the money is kept invested for five years (withdrawals of contributions are always tax-free). Unfortunately, you bump up against the income limits for contributing to a Roth. If you earn more than $183,000 as a married couple, you can’t contribute the entire $5,500. Your eligibility for how much you can contribute phases out up to $193,000, so you can make a partial contribution. The IRS has guidelines on how to calculate the reduced amount.

You can also make a nondeductible contribution to a traditional IRA, put it in cash, and then convert it to a Roth—a strategy commonly referred to as a “backdoor Roth.” This move would cost you little or nothing in taxes, if you have no other IRAs. But if you do, better think twice, since those assets would be counted as part of your tax bill. (For more details see here and here.) There are pros and cons to the conversion decision, and so it may be worthwhile to consult an accountant or adviser before making this move.

Another strategy for boosting savings is to put money into a Health Savings Account, if your company offers one. Tied to high-deductible health insurance plans, HSAs let you stash away money tax free—you can contribute up to $3,350 if you have individual health coverage or up to $6,650 if you’re on a family plan. The money grows tax-free, and the funds can be withdrawn tax-free for medical expenses. Just as with a 401(k), if you leave your company, you can take the money with you. “So many people are worried about paying for health care costs when they retire,” says Ross Langley, a certified public accountant at Halbert Hargrove. “This is a smart move.”

Once you exhaust your tax-friendly retirement options, you can save in a taxable brokerage account, says Langley. Focus on tax-efficient investments such as buy-and-hold stock funds or index funds—you’ll probably be taxed at a 15% capital gains rate, which will be lower than your income tax rate. Fixed-income investments, such as bonds, which throw off interest income, should stay in your 401(k) or IRA.

Do you have a personal finance question for our experts? Write to AskTheExpert@moneymail.com.

Read next: Why Regular Retirement Saving Can Improve Your Health

MONEY identity theft

Here’s What To Do If Your Info Was Stolen from the IRS

150527_FF_IRSStolen
Thomas Northcut—Getty Images

Thieves stole 100,000 past tax returns from the IRS, says the agency.

Criminals using stolen personal data accessed old tax returns of 100,000 people through the Internal Revenue Service’s website, the agency announced Tuesday.

Using Social Security numbers, birth dates, addresses and other information acquired outside the IRS website, probably from data breaches at other insitutions, the criminals were able to clear a multi-step authentication process and request tax returns and other filings through the IRS’s “Get Transcript” application. The criminals then used the information obtained from those forms to file fraudlent tax returns, the IRS said.

Though the agency has now shut down the “Get Transcript” application, it sent nearly $50 million in refunds to the scammers before detecting the breach.

Later this week, the IRS will begin sending out notification letters to each of the 200,000 taxpayers whose accounts the scammers attempted to access. About 50% of those attempts—some 100,000—were successful, and the IRS will offer free credit monitoring to those taxpayers. Either way, if you are notified by the IRS, there is more you can do to protect yourself.

1. Check In with the IRS

The IRS said it will be “marking taxpayer accounts on our core processing system to flag for potential identity theft to protect taxpayers going forward.” But anyone notified by the IRS—whether your data was successfully stolen or not—should call the IRS Identity Protection Specialized Unit at 800-908-4490 to check that the agency has indeed placed an alert on your account and that the system reflects that your information (and return) has been compromised. You may also want to contact your state revenue agency to be certain a state tax return wasn’t fraudulently filed for you as well. (For your state’s hotline, check out this list.)

Also report the theft to local police and have it documented. While local law enforcement is unlikely to investigate, many government agencies and credit bureaus require an official theft report to help you solve the fall-out.

2. Add Another Layer of Security

If you are a victim of id theft, the IRS should issue you a personal identification number that will provide you with another level of security. You’ll need to submit this PIN along with your Social Security number when you file any tax form going forward so that the IRS knows to carefully check over your account. As an identity theft victim, you’ll get a new PIN every year. If you don’t receive it, request one because this extra step could save you from dealing with fraudulent returns year after year.

3. Alert the Credit Bureaus

“If a thief had enough information about you to file a false tax return, he could have also opened new credit card accounts or taken out a loan in your name,” says CPA Troy Lewis, chairman of the American Institute of CPAs’ tax executive committee.

Set up free fraud alerts with the three major credit reporting bureaus, Equifax, Experian, and TransUnion. These alerts, which last 90 days but can be renewed, warn potential creditors or lenders that you are an identity theft victim and that they must verify your identity before issuing credit.

You can go a step further by placing a credit freeze on your files, which instructs the credit agencies to prevent new creditors from viewing your credit score and report. With a police report, it’s free; without one, it can cost as much $10, depending on your state.

A freeze will keep you from accessing instant credit, too. So if you need to apply for a loan, for example, you’ll need to give the agency permission to thaw your data, and in some cases you’ll pay a fee to lift the freeze, which can take a few days.

MONEY advises against paying for credit monitoring services, since you can do the same work yourself for free and the steps above are a better preventative measure. But if the IRS offers it to for free, you may want to sign up for the service.

4. Check Your Credit Report

You are entitled to a free copy of your credit report from each of the three agencies. Check them carefully for unauthorized activity. Look at your history as well as recent activity. Just because you were first alerted to the problem through a false tax return does not mean that’s where the ID theft started.

If you see errors in your report, such as wrong personal information, accounts you didn’t open, or debts you didn’t incur, dispute those errors with each credit agency and the fraud department of the businesses reporting that inaccurate information.

5. Be Patient

The IRS says a typical case of ID theft can take 180 days to resolve. And even after you’ve cleared up this year’s tax mess, tax and credit fraud can be a recurring problem.

When a thief files a false return and beats you to filing, the IRS flags your legit return and processes it manually, meaning your refund could be delayed for months. The IRS will always pay you your refund, regardless of whether it already paid it out to a fraudster. If your tax fraud case hasn’t been resolved and you’re experiencing financial difficulties because of the holdup with your refund, contact the taxpayer advocate service at 877-777-4778.

MONEY Taxes

Thieves Stole $50M in Tax Refunds Using IRS’s Online Tool

The hackers apparently used already-stolen identity information to send phony requests through the IRS's website.

MONEY Budgeting

Americans Spend More on Taxes Than Food, Clothing and Shelter Combined

hand pulling cash out of wallet
Getty Images

The surprising math on how we spend

Every year, the Tax Foundation compares the total amount of taxes paid in America and the amount of spending on the necessities of food, clothing, and shelter. In most recent years, the Tax Foundation has concluded that Americans spend more on taxes than on necessities — and 2015 is no different.

The Tax Foundation projections show a total of $4.85 trillion in taxes paid in 2015, divided between $3.28 trillion in federal taxes and $1.57 trillion collected at the state and local level. According to the Tax Foundation, total taxes are approximately 31% of the national income. Using data available from the Bureau of Economic Analysis (BEA), the Tax Foundation calculated approximately $4.3 trillion in spending for the basics with food at around $1.8 trillion, clothing at $0.3 trillion, and housing at $2.2 trillion.

Here’s the real question: Is this spending comparison indicative of a problem or of a correct and equitable tax structure? Should any of us be outraged? Probably not, although there are reasons for concern.

Certainly, the trend is not promising. The gap between taxes and spending on the essentials in 2012 was approximately $150 billion, rising to almost $300 billion in 2014 and around $550 billion in 2015. It’s hard to spin that as a positive development.

The Tax Foundation’s report also says nothing about equity of taxes and spending. Certainly, the Tax Foundation can leave the impression that taxes are too high for all Americans by using aggregate values. More progressive sites such as the Center on Budget and Priority Policies (CBPP) call these values misleading, pointing out that with our progressive tax system, poorer Americans clearly pay a greater share of their income for the essentials and less in taxes.

Meanwhile, the wealthy pay more in taxes and while they may make more discretionary purchases in food, clothing and shelter, it isn’t enough to make up the difference. Therefore the “average” (middle-class) American probably does not pay more in taxes than for the basics, and the lower income levels certainly do not.

This conclusion implies a higher amount of wealth transfer to help lower-income Americans with spending on their basics. Indeed, a graph created by the Tax Foundation shows a steady rise in transfer payments as a percentage of the cost of living, from 0.5% to nearly 35% in 2011. The Tax Foundation acknowledges some double-counting inflating the value, but the trend is still valid.

This illuminating graph and other explanations may be found in a 2012 article on the Tax Foundation website. For example, the amount spent on taxes was roughly equal to that spent on food, clothing and shelter from 1929 until the 1990’s, when the divergence began. Since then, taxes have increased disproportionately in a sawtooth pattern, with dips corresponding to economic crashes (2001 and 2007-2009).

If you have a budget — and you should have if you don’t — you can certainly figure out whether or not you paid more in taxes than you did in 2014, and can probably make a good estimate for 2015. What you do with that information is up to you.

You may well conclude that you pay too much in taxes, but use the exercise as an opportunity to analyze your spending on the basics. Are you getting the best value out of your dollar for your food, clothing, and housing payments? We’ll just ignore the subject of whether you’re getting your money’s worth out of your taxes. Save your outrage for that topic.

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MONEY Taxes

Can I Write Off a $30,000 Loan That My Friend Never Paid Back?

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Neil Overy—Getty Images

A reader, Gerard, reached out to us recently wondering if there was any way to recover any of the thousands of dollars loaned to a friend. At this point, he doubts the person actually intended to repay the loan. Here’s what he told us:

My mother and I lent a series of loans to a person we regarded as a close personal friend for business and personal reasons in the amount of more than $30,000. We have tried since August of last year to arrange repayment without any success. My mother is a senior citizen and we believe that the debtor never intended to repay loan. What can we do (generally) and regarding taxes?

We posed the question to Burton M. Koss, senior tax adviser at Cortés & Baker, an accounting firm in Hilliard, Ohio. Koss said it’s possible that the loss could be claimed on taxes, but first Gerard and his mother will have to do some investigating to conclude the debt is uncollectable. “If it is really a bad debt, it’s a capital loss,” he said.

“If the person who borrowed the money has any assets, or if they have a job and their wages could be garnished, then the debt may not be worthless,” Koss said. “You may be able to collect the money. You should consult an attorney to explore the possibility of filing a lawsuit.” If the borrower has assets or income, it may make sense to hire a lawyer to write a persuasive letter about repayment of the debt, he said.

The tax treatment depends on whether it’s a business loan. In Gerard’s case, Koss thinks it’s likely it’s a nonbusiness loan even though it was partly for business reasons. “A loan is only considered a business bad debt if the lender made the loan as part of the regular operation of the lender’s business,” he said. “If the lender is an individual who is not operating a business, then it is a nonbusiness bad debt.”

Taxwise, it would be similar to buying bonds in a company that went bankrupt. “It is essentially an investment that went bad, and the value of the investment is now zero,” Koss said. It is treated as a capital loss, which means you can deduct only $3,000 of the loss, unless you have a capital gain to offset. The remaining amount is carried forward to the following year. You can deduct up to $3,000 each year until it is used up.

The first step is to determine whether the debt is worthless. “If you are certain that you could not collect the money even if you filed a lawsuit and won, then the debt may be worthless. I recommend that you consult a professional tax adviser for assistance with the preparation of your tax return,” Koss said.

Making loans to family and friends can be a complex business. Though it can and sometimes does go well, it also has the potential to harm relationships if repayment doesn’t go the way people expected. Many experts recommend against lending money you cannot afford to give. (Or at the very least, you should be able to afford to make it a gift so that repayment is not required to make your own budget work).

More from Credit.com

MONEY retirement planning

3 Ways to Build a $1 Million Nest Egg Despite Lower Investment Returns

Andy Roberts/Getty Images

Whether your retirement goal is six figures or seven figures, it's harder to achieve in today's market—unless you have a plan.

A new Transamerica Center for Retirement Studies survey found that $1 million is the median savings balance people estimate they’ll need for retirement. And many savers have been able to reach or exceed that goal, according a report last year by the Government Accountability Office showing that some 630,000 IRA account owners have balances greater than $1 million.

But most of these people accumulated those hefty sums in an era of generous investment returns. Between 1926 and 2014, large-company stocks gained an annualized 10.1%, while intermediate-term government bond returned 5.3% annually, according to the 2015 Ibbotson Classic Yearbook. During the go-go ’90s annualized gains were even higher—18.2% for stocks and 7.2% for bonds. Today, however, forecasts like the one from ETF guru Rick Ferri call for much lower gains, say, 7% annualized for stocks and 4% or so for bonds. Which makes building a seven-figure nest egg more of a challenge.

Still, the goal remains doable, if you go about it the right way. Here are three steps that can increase your chances of pulling it off.

1. Get in the game as early as possible—and stay in as long as you can. The more years you save and invest for retirement, the better your chances of building a big nest egg. Here’s an example. If you’re 25, earn $40,000 a year, receive annual raises of 2% during your career and earn 5% a year after expenses on your savings—a not-too-ambitious return for a diversified portfolio of stocks and bonds—you can accumulate a $1 million account balance by age 65 by saving a bit more than 15% of salary each year. That’s pretty much in line with the recommendation in the Boston College Center For Retirement Research’s “How Much Should People Save?” study.

Procrastinate even a bit, however, and it becomes much tougher to hit seven figures. Start at 30 instead of 25, and the annual savings burden jumps to nearly 20%, a much more challenging figure. Hold off until age 35, and you’ve got to sock away more a far more daunting 24% a year.

Of course, for a variety of reasons many of us don’t get as early a start as we’d like. In that case, you may be able to mitigate the savings task somewhat by tacking on extra years of saving and investing at the other end by postponing retirement. For example, if our hypothetical 25-year-old puts off saving until age 40, he’d have to sock away more than 30% a year to retire at 65 with $1 million. That would require a heroic saving effort. But if he saved and invested another five years instead of retiring, he could hit the $1 million mark by socking away about 22% annually—still daunting, yes, but not nearly as much as 30%. What’s more, even if he fell short of $1 million, those extra years of work would significantly boost his Social Security benefit and he could safely draw more money from his nest egg since it wouldn’t have to last as long.

2. Leverage every saving advantage you can. The most obvious way to do this is to make the most of employer matching funds, assuming your 401(k) offers them, as most do. Although many plans are more generous, the most common matching formula is 50 cents per dollar contributed up to 6% of pay for a 3% maximum match. That would bring the required savings figure to get to $1 million by 65 down a manageable 16% or so for our fictive 25-year-old, even if he delayed saving a cent until age 30. Alas, a new Financial Engines report finds that the typical 401(k) participant misses out on $1,336 in matching funds each year.

There are plenty of other ways to bulk up your nest egg. Even if you’re covered by a 401(k) or other retirement plan, chances are you’re also eligible to contribute to some type of IRA. (See Morningstar’s IRA calculator.) Ideally, you’ll shoot for the maximum ($5,500 this year; $6,500 if you’re 50 or older), but even smaller amounts can add up. For example, invest $3,000 a year between the ages of 25 and 50 and you’ll have just over $312,000 at 65 even if you never throw in another cent, assuming a 5% annual return.

If you’ve maxed out contributions to tax-advantaged accounts like 401(k)s and IRAs, you can boost after-tax returns in taxable accounts by focusing on tax-efficient investments, such as index funds, ETFs and tax-managed funds, that minimize the portion of your return that goes to the IRS. Clicking on the “Tax” tab in any fund’s Morningstar page will show you how much of its return a fund gives up to taxes; this Morningstar article offers three different tax-efficient portfolios for retirement savers.

3. Pare investment costs to the bone. You can’t force the financial markets to deliver a higher rate of return, but you can keep more of whatever return the market delivers by sticking to low-cost investing options like broad-based index funds and ETFs. According to a recent Morningstar fee study, the average asset-weighted expense ratio for index funds and ETFs was roughly 0.20% compared with 0.80% for actively managed mutual funds. While there’s no assurance that every dollar you save in expenses equals an extra dollar of return, low-expense funds to tend to outperform their high-expense counterparts.

So, for example, if instead of paying 1% a year in investment expenses, the 25-year-old in the example above pays 0.25%—which is doable with a portfolio of index funds and ETFs—that could boost his annual return from 5% to 5.75%, in which case he’d need to save just 13% of pay instead of 15% to build a $1 million nest egg by age 65, if he starts saving at age 25—or just under 22% instead of 24%, if he procrastinates for 10 years. In short, parting investment expenses is the equivalent of saving a higher percentage of pay without actually having to reduce what you spend.

People can disagree about whether $1 million is a legitimate target. Clearly, many retirees will need less, others will require more. But whether you’ve set $1 million as a target or you just want to build the largest nest egg you can, following the three guidelines will increase your chances of achieving your goal, and improve your prospects for a secure retirement.

Walter Updegrave is the editor of RealDealRetirement.com. If you have a question on retirement or investing that you would like Walter to answer online, send it to him at walter@realdealretirement.com.

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TIME Economy

Here’s the Secret Truth About Economic Inequality in America

Mmmmmoney: Get a grip; it's just paper
KAREN BLEIER; AFP/Getty Images Mmmmmoney: Get a grip; it's just paper

Once you look at the issue this way, it's hard to think of it any other way

We all know that inequality has grown in America over the last several years. But the conventional wisdom among conservatives and even many liberals has always been that inequality was the price of growth–in order to get more of it, we needed to tolerate a bigger wealth gap. Today, Nobel laureate Joseph Stiglitz, the Columbia professor and former economic advisor to Bill Clinton, blew a hole in that truism with a new report for the Roosevelt Institute entitled “Rewriting the Rules,” which is basically a roadmap for what many progressives would like to see happen policy wise over the next four years.

There are a number of provocative insights but the key takeaway–inequality isn’t inevitable, and it’s not just a social issue, but also an economic one, because it’s largely responsible for the fact that every economic “recovery” since the 1990s has been slower and longer than the one before. Inequality isn’t the trade-off for economic growth; rather, it’s both the cause and the symptom of slower growth. It’s a fascinating document, particularly when compared to the less radical Center for American Progress policy report on how to strengthen the middle class, authored by another former Clinton advisor, Larry Summers, which was widely considered to set out what may be Hillary Clinton’s economic policy agenda.

While the two have some overlap, the Stiglitz report is bolder and more in-depth. It’s also a much more damning assessment of some of the policy changes made not only during the Bush years, but also during Bill Clinton’s tenure, in particular the continued deregulation of financial markets, changes in corporate pay structures, and tax shifts of the early 1990s. During a presentation and panel discussion on the topic of inequality and how it relates to growth (I moderated the panel, which included other experts like Nobel laureate Bob Solow, labor economist Heather Bouchley, MIT professor Simon Johnson and Cornell’s Lynn Stout, as well as pollster Stan Greenberg), Stiglitz made the point that both Republican and Democratic administrations have been at fault in crafting not only policies that forward inequality, but also a narrative that tells us that we can’t do anything about it. “Inequality isn’t inevitable,” said Stiglitz. “It’s about the choices we make with the rules we create to structure our economy.”

One of the big economic questions in the 2016 presidential campaign will be, “why does inequality matter?” The answer–because it slows growth and thus affects everyone’s livelihood–is simple. But the reasons behind it are complex and systemic. Senator Elizabeth Warren and New York Mayor Bill de Blasio were on hand to help connect the dots on that front, with de Blasio calling for more social action in order to “move to a society that rewards work over wealth,” and Warren re-iterating a hot button point that she made last week about inequality and the trade agenda; she believes that Fast Track trade authority for President Obama would allow big bank lobbyists on both sides of the Atlantic to further water down financial reform that could combat inequality, which led the President to call her ill-informed (he didn’t elaborate much on why). Warren noted that the trade deal was being crafted in conjunction with 500 non-governmental actors, 85 % of whom are either industry lobbyists or from the big business sector.

Warren’s mantra about how America’s economic game “is rigged,” ties directly into two of the key takeaways from the Stiglitz report; first, that inequality is all about the political economy and Washington policy decisions that favor the rich, and secondly, that it’s not one single decision–Dodd Frank, capital gains tax, healthcare, or labor standards–but all of them taken together that are at the root of the problem. “Our economy is a system,” says Stiglitz, and combatting inequality is going to require a systemic approach across multiple areas–financial reform, corporate governance, CEO pay, tax policy, anti-trust law, monetary policy, education, healthcare, and labor law. It might also involve revamping institutions like the Fed; Stiglitz and Solow both agreed that the Fed needs to start tabulating unemployment in a new way, perhaps focusing not on a particular number target, but on when wages actually start to go up, which Stiglitz said is the best sign of when the country’s employment picture is actually improving.

Thinking in these more holistic terms would be a big shift for lawmakers used to tackling each of these issues alone in their respective silos. But as Stiglitz and the other economists on the panel pointed out, they are often interrelated–consider the way in which pension funds work with shareholder “activists” to goad corporations into over-borrowing to make large payouts to investors even as lowered wages and profits kept in offshore tax havens mean that long-term investments aren’t made into the real economy, slowing growth. Or how continuing to tie worker’s healthcare benefits to companies makes them virtual slaves, decreasing their ability to negotiate higher wages, not to mention start their own businesses.

It’s a huge topic, and the Roosevelt discussion was part of the continuing campaign on the far left to try to make sure that presumptive nominee Hilary Clinton doesn’t continue business as usual if and when she’s in the White House. Progressives are looking for her to do more than talk about minimum wage and redistribution; they want her to make fairly radical shifts in the money culture and political economy of our country. That would mean a decided split from the policies of the past, including many concocted by her husband’s own advisors, ghosts that Hilary Clinton has yet to publically reckon with.

MONEY Financial Planning

Kill The Clutter: When to Toss Financial Documents

wastebasket
Getty Images

A handy guide to what to keep and what to throw away.

If you haven’t already opted to go paperless, you might be swimming in a flood of receipts, bills, pay stubs, tax forms, and other financial documents. But it doesn’t have to be that way. Some of those papers need to be kept, but others can be shredded and tossed.

Here’s a guide on what to keep and for how long.

Receipts
Receipts for anything you might itemize on your tax return should be kept for three years with your tax records.

Home improvement records
Hold these for at least three years after the due date of the tax return that includes the income or loss on the home when it’s sold. If you plan to sell the house and you have made improvements to it, keep receipts for those improvements for seven years — you may need them to lower the taxable gain on the house when you sell it.

Medical bills
Keep receipts for medical expenses for one year, as your insurance company may request proof of a doctor visit or other verification of medical claims. If your medical expenses total more than 10% of your adjusted gross income, you can deduct them. If you plan to take that deduction, you’ll need to keep the medical records for three years for tax records.

Paycheck stubs
Keep until the end of the year and discard after comparing to your W-2 and annual Social Security statement.

Utility bills
Keep for one year and then discard — unless you’re claiming a home office tax deduction, in which case you must keep them for three years.

Credit card statements
Keep until you’ve confirmed the charges and have proof of payment. If you need them for tax deductions, keep for three years.

Investment and real estate records
Keep for three years, as you may need the documentation for the capital gains tax if you’re audited by the IRS. These records help track your cost basis and the taxes you owe when you sell stocks or properties. Once you receive the annual summaries, you can shred your monthly statements.

Bank statements
You’ll need bank statements for up to three years if you are audited by the IRS. If your bank provides online statements, you can switch to receiving your bank documents online and cut down on paper.

Tax returns
The IRS recommends that you “[k]eep records for 3 years from the date you filed your original return or 2 years from the date you paid the tax, whichever is later.” If you file a claim for a loss from worthless securities or bad debt deduction, keep your tax records for seven years.

Records of loans that have been paid off
Keep for seven years.

Active contracts, insurance documents, property records, or stock certificates
Keep all these items while they’re active. After contracts are completed or insurance policies expire, you can discard these documents.

Marriage license, birth certificates, wills, adoption papers, death certificates, or records of paid mortgages
Keep forever.

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MONEY Ask the Expert

When Does a Gift Trigger a Tax Bill?

Ask the Expert – Everyday Money illustration pulling cash out of wallet
Robert A. Di Ieso, Jr.

Q: “I want to pay off a sizeable ($15,000) debt that my adult son has. Are there any tax implications for either of us? —Jack

A: Your generosity will have no impact on your son’s taxes, but in theory it could affect the taxes on your estate down the road.

Every year, you’re allowed to give another person up to the annual gift tax exclusion—this year $14,000—without reporting the transfer to the IRS or having to pay taxes on the sum, says CPA Cari Weston, senior technical manager of the American Institute of CPAs taxation division.

For any gift above that limit, you will have to report the excess to the IRS through Form 709. That sum will be subtracted from your total lifetime gift and estate tax exclusion. Currently you can transfer up to $5.43 million in assets federal-tax-free over your lifetime, making it unlikely that any gifts will push your estate above that threshold.

Of course, there are easy ways to get around the limit and avoid any risk of estate taxes. If you’re married, you and your wife can together give up to $28,000 to your son per year. Or, if your son is married, you can gift him $14,000 and gift his spouse the other $1,000 to settle the debt, suggests Weston.

Paying the full amount directly to the creditor, while perhaps a wise financial move given your son’s current predicament with debt, will not help you get around the gift-tax limit, says Weston. No matter who the check is made out to, the IRS will still count it as a gift.

If you are covering tuition or medical expenses for another person, says Weston, you can get around the gift-tax rule, however, as both of these types of gifts are considered non-taxable.

MONEY Sports

NFL’s Switch From Nonprofit Status Looks to Benefit…the NFL

The NFL has been knocked repeatedly for being a tax-exempt organization, but dropping that status will actually help it.

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