Organizing Your Taxes

Often I am asked: "How long should I keep paper records?" The answer to this question varies depending on whether you are filing a personal tax return or taxes for a business you own and operate from your home. Publication 552 (Rev. 4/2005) as published by the Department of the Treasury, Internal Revenue Service, lists the guidelines for how long records should be kept. Publication 583 gives the guidelines for "Starting a Business and Keeping Records." If you have questions regarding the length of time to keep records for a particular need, you may want to consult with your certified public accountant.
 

When the time comes to prepare your taxes, these documents will be easy to locate, not to mention the fact that by having an established location for them, they will not be miss-placed during the year. This list is not meant to be an entire list of documents that you receive in the mail – you may receive some that are not listed here and some that are listed, you may not receive. The idea is to have a location for you to store these types of documents that you get one time only, or in the case of donations perhaps several, so that you can quickly locate them when it is time to prepare your return. It does not make a lot of sense to create a folder for each type of form – that will just take up more space in your filing system.

Why Keep Records

• To use when preparing your tax return
• To support items reported on your tax return
• To identify sources of income
• To track expenses
• To keep the cost basis of property or investments

Keeping Your Tax Records Organized

The IRS does not require you to keep your tax records organized a certain way. There are however a few things that you can do to make your life easier when it comes time to prepare your taxes. The last thing you want to do is spend all of your time looking for the documents needed in order to prepare your taxes. I personally have witnessed many of our clients that have not been able to file their taxes for several years because they could not find all of the information they needed – which is usually why we are called in to help them set up a system to organize their papers, so they can begin to file taxes on time, rather than filing an extension or not filing at all.

Tips for Keeping Your Tax Records Organized

1. Establish a file folder labeled Taxes 2011 (insert the current year on the label). This folder will be used to store tax related documents such as donation receipts and the forms you receive in the mail in January that you need to prepare your taxes. Some of the forms you may receive in the mail include:

• W-2's for yourself, spouse and dependent children

• 1099-G (Unemployment)

• 1099-INT (Interest Statements for Mortgage, Savings, Escrow and U.S. Bonds)

• 1099-DIV (Dividend Statements for Stocks and Bonds)

• 1099-MISC (Income Statements for Income Property and Equipment)

• 1099-R (Statements for Pensions, Annuities and IRA distributions) Social Security Statements the show benefits

• Property Tax Documents

When the time comes to prepare your taxes, these documents will be easy to locate, not to mention the fact that by having an established location for them, they will not be miss-placed during the year. This list is not meant to be an entire list of documents that you receive in the mail – you may receive some that are not listed here and some that are listed, you may not receive. The idea is to have a location for you to store these types of documents that you get one time only, or in the case of donations perhaps several, so that you can quickly locate them when it is time to prepare your return. It does not make a lot of sense to create a folder for each type of form – that will just take up more space in your filing system.

2. If you make a lot of property donations, such as used clothing, toys, computer equipment or  
   household items, consider using "It’s Deductible" from Turbo Tax.

Using this software it will help you:

a. Assign Accurate Values by accessing thousands of values for the items you donate to charity.

b. Track 2006 Donations.

c. Automatically prepare the IRS Tax Form 8283 which is required when noncash donation deduction is over $500.

d. Prints reports you need on the correct form and makes it easy to substantiate your deductions.

3. Receipts. Use an accordion style folder or multiple envelopes to track your receipts by month. If you use an accordion file folder system for receipts, you can purchase one with the tabs already labeled with the months on the tabs. Store this in a location that is easily accessible so that when you need to deposit your receipts you can do so directly in the file. If you chose to use envelopes to keep receipts in, write the month and the year on the front and keep the current month’s envelope in a location where you can quickly access it. If you need to break down your expenses by category, you may want to consider doing so once per month, perhaps at the end of the month, before filing away that envelope and getting out a new one for the next month. This will take much less time than having to categorize an entire years worth of receipts. Some of the categories you may want to use are: clothing, groceries, personal care items, gas, entertainment etc…

4. If you prefer to track your expenses using computer software, there are two commonly used programs: Microsoft Money and Quicken by Intuit. These software programs are designed to allow you to track your spending and expenses, balance your checkbook and download bank statements from the Internet, pay bills online, create and manage a budget, transfer data to Turbo Tax, manage investments and much more. One of the many nice things about using software to manage you money, you can categorize your expenses so you can tell in a snap how much you are spending in a particular area – which will then transfer over to your taxes. An example of this might be keeping track of your medical expenses for the year so that you can apply this when you prepare your return.

 5. After you’ve completed your tax return, be sure to keep a copy of the return along with all of the supporting documentation. You can use your "Taxes 2006" folder – or the folder appropriate for that year to file away the copy of your return. If you have an accountant that prepares your return, most likely you will receive a copy back from he/she and you can just keep your tax return in that and file it away with your other tax records.

6. Keep a rotating tax file. If you do not have space in your current filing system to store six years worth of taxes, you may want to consider purchasing a filing box made of plastic that has rails in it to hold hanging file folders. This box becomes your "Tax Records" box that you can store in an out-of-the-way location, yet you will still be able to put your hands on it when the time comes.

Creating the system:

Step 1: Outfit your box with six box-bottom hanging file folders labeled Years 1 through 6 (rather than by the year itself) to avoid having to re-label annually.

Step 2: Keep last year’s tax records and related receipts in the Year 1 folder, the previous year’s records in Year 2 and so on.

Step 3:  When you are ready to file the current year's tax records, toss/shred the contents of the "Year 6" folder and move each set of records back one folder and then put the current years taxes in Year 1.

Step 4: Place the box in your attic, basement, closet or some other place where you can quickly locate it if you ever need one of your returns. Be sure to inform other family members of the location of the box.

Keys to Success

The key to success and time-savings is to develop a system you will use on a regular basis so that when it is time to prepare your tax return you do not need to spend hours searching for receipts and charitable contributions.

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