Proper recordkeeping is always prudent, but it’s especially critical in financial and investment areas affected by taxes. Your inability to document transactions for tax, estate, and investment purposes can be very costly. Here are ideas to help with your recordkeeping.

Investment expenses: You can deduct all expenses incurred for security transactions (telephone, mail, travel, etc.), as well as tax preparation fees and professional dues and publications related to investments. You also can deduct the annual fees you pay for a Keogh or IRA. Advisory: Keep in mind that these expenses are deductible only to the extent they exceed 2% of your adjusted gross income (AGI).

Security transactions: Save all stock and bond confirmations, as well as all 1099s and other cost records on important investments, e.g., antiques, art, and coin collections. Remember, when you sell the investments, you will have to document your cost basis in order to determine your capital gain or loss.

Checkbooks: Business, investment, and personal (mortgage) interest have different tax treatments. To help with your recordkeeping for tax purposes, consider separate checking accounts for recording income and expenses in each category.

Retirement plans: IRA, Keogh, employer plans. All data should be kept indefinitely, including annual statements, contributions by you and your employer, buy and sell confirmations, and correspondence from your employer and other institutions with whom you have retirement accounts. In addition, keep all information on rollovers.

After-tax contributions: The records of your personal contributions to retirement plans are also very important. If you made contributions with after-tax income, the amounts distributed to you (excluding capital gains and income) are not subject to taxation. An example of this would be voluntary 401(k) contributions made with your after-tax income.

Relevant Resource:
Resource Report #32: Your Investments: 44 Action Alerts to Use Today and Throughout the Year

There are three to consider:

• Study all the tax consequences of trust arrangements carefully. There's not just the current tax on income earned by the trust to be considered. There's also the potential gift tax involved in transferring assets to a trust for the benefit of someone else, as well as federal and state income and estate taxations to consider if the trust is in your name or controlled by you at your death.
  
  
• Don't overlook applicable state laws. They can vary significantly in their tax treatment of trusts. Also, if you moved to another state since the trust agreement was drawn, have the trust documents reviewed by a lawyer in the state where you currently reside.
  
  
• Determine how much control you want to retain over the trust and its assets. Don't give up control or ownership rights casually. For example, if your children are the beneficiaries of the trust, they may choose to spend trust assets frivolously on something other than a college education unless you have retained some control over how the trust money will be used.

Be careful; using an irrevocable trust (terms can’t be changed) may have tax advantages for you now but cause you serious financial problems later. So get advice from both your accountant and lawyer before setting up a trust.

Review the ownership of all policies: Is it you, the insured, the beneficiary, another person, insurance trust, or a business? Reason: You may wish to change the ownership for tax reasons. If the ownership is in your name, it will be included as part of your taxable estate and subject to estate taxes. In contrast, if your spouse, children, or an insurance trust owns the policy, there is no estate tax payable on the insurance proceeds on your death since you don’t own the policy.

Big Caution: The proceeds from life insurance policies are included in your personal estate if transferred within three years of death. It's called the IRS' contemplation of death rule. In addition, the IRS could label the transfer a taxable transaction. So check with your insurance agent and accountant before transferring, selling, or gifting any life insurance policy to your family, business, or a trust.