5 precious papers to hang on to

Another reason to hang onto tax returns: Social Security screw-ups.

Five years ago, Christina Miller of Seal Beach, Calif., noticed that her annual earnings from Social Security contained a mistake.

"For the year 1978, Social Security has incorrectly stated my income as $1,299," Miller wrote, "instead of $12,299."

Trying to get the record fixed, though, has become "a five-year nightmare." Social Security told her to write to the IRS, which told her it's up to Social Security to fix the error, adding that the IRS doesn't provide copies of tax returns that old. Miller, 56, even contacted her former employer, who "also does not keep records going back this far."

Social Security bases a worker's benefit on her 35 highest-earning years. Fortunately for Miller, 1978 wasn't one of those years. But she wonders how others fix serious errors that are more than a few years old without documents.

"What do (people) do who have had a house fire or other disaster and have lost their records?" Miller asked." I am surprised that there is no recourse."

Home-improvement receipts

If your home has gained more than $250,000 in value (or $500,000 for a couple), you'll want to look for ways to reduce your taxable profit when you sell. Receipts for home improvements can help you do that.

The cost of improvements can be added to your tax basis -- essentially, the price you originally paid for your home. That, in turn, can reduce your taxable profit.

(For those who need to know all the gory details: Under current tax code, your tax basis is subtracted from the home's selling price, minus commissions and other selling costs, to determine potentially taxable profit. The first $250,000 of profit per owner is exempt from taxes, but profit beyond that is typically subject to capital gains taxes. The top federal capital gains rate is currently 15%.)

Improvements, according to IRS Publication 523, "Selling Your Home," are defined as changes that "add to the value of your home, prolong its useful life, or adapt it to new uses." Some examples:

• Additions

• Interior remodeling

• Landscaping and fences

• Upgrades to home systems such as heating and air conditioning

• New roof, windows or doors

• Insulation

Improvements do not include maintenance or repairs, such as "repainting your house inside or outside, fixing your gutters or floors, repairing leaks or plastering, and replacing broken window panes," unless those projects are part of an extensive renovation or remodeling job.

Also, you can't count any improvement you later rip out. If, for example, you install wall-to-wall carpeting and then remove it in favor of hardwood floors, you can't add the cost of the carpeting to your tax basis.

You'll want to keep receipts detailing the work that was done, or the cost of supplies if you did the work yourself. (A credit-card statement showing a Home Depot charge probably won't be sufficient proof, which is why you want to hang on to the receipts.)

And since you're likely to own your home for years, if not decades, it's smart to keep the original receipts as well as backups since storage technology can change over time (see above).

Final account statements

Collection agencies have found a new growth industry: people who have already paid their bills.

As I wrote in "Sleazy new debt-collector tactics," a host of collectors now specialize in buying up old (and often poorly documented) debts. Even when the collectors can't prove the debt is legitimate, some debtors will pay up rather than risk damage to their credit histories.

• Video: Social Security deposits garnisheed by debt collectors

Fred was one of them. When a collector contacted him about owing $194 for a cell phone account he'd closed in 2001, he didn't recall owing the debt. But rather than risk his credit scores, he paid up.

Later he came across an old statement showing he had, indeed, paid the original bill in full. Unfortunately, paying the bogus bill didn't save his scores -- far from it. The collectors reported the account anyway, sending Fred's scores to the basement.

Continued: Save the statement that says 'zero' balance

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