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In addition to the threat of having to pay the government more money, many despise tax time because of their overwhelmingly disorganized tax records. Having to dig through a cluttered mess of paperwork to locate required tax documents - such as pay stubs, bank statements, investment records, medical receipts, charitable contributions and much more - can make the income tax filing process far more time-consuming and stressful than it needs to be.
In addition to creating a nightmare for tax preparation, having disorganized tax records causes many Americans to overpay the IRS each year. Failing to have orderly tax documentation increases the chance of you missing out on tax deductions that could drastically lower the amount that you owe the IRS.
Since you already know the tax filing deadline, the best way to avoid the headache of tax time is to be proactive and prepare for your income tax filing now.
How to Create a System
Step 1: Determine where you are going to store your tax records. If you do not have a filing cabinet, you can use any old box. Another great option is to use an accordion letter file, which will not only help keep your documents organized, but will also allow you to save space. You can purchase an accordion file organizer online or in any department store's stationary or office supply section for about $10. These file folders are expandable and typically have a dozen or so pockets separated by tabbed dividers, and include tab inserts for you to label each section with. While a filing cabinet is still a good option for organizing tax records, many prefer to store tax documents in an accordion file because of its portability; the entire file can be slid into a fire-safe box when not in use, or simply handed off to an accountant at tax time.
Step 2: Label your file cabinet or accordion file with the three main types of records required for tax filings: income, expenses and deductions, and investments. Since one or more of these main categories will likely have subcategories, you should leave a few empty pockets in between each main section so that you can add in new subsections as needed.
Step 3: Begin organizing the paperwork that you already have and develop a system that you can realistically follow to maintain this organization throughout the year. Going forward, as soon as you receive any paperwork documenting income that you have earned - even the mere 14 cents interest from your savings account – slide the paperwork into your "Income" file. As you place a document into your accordion system or filing cabinet, record the transaction on a cover sheet that you have made specifically for that file section. If you receive a bank statement showing that you have earned 14 cents interest, jot down the amount and source of this earned income on the "Income" cover sheet, and put the document into the file. This should be done for the three main tax preparation categories in addition to all sub-categories.
What Goes in Each Section of Your File Organizer?
Any paperwork documenting money that you have earned - whether from your job, commissions, self-employment or freelance work, interest earned, distributions, gambling winnings, etc. - should be stored in the "Income" section of your filing system. Write down each of your earnings on the "Income" cover sheet, and hang on to all documents that indicate the income source.
Expenses & Deductions
Depending on your unique financial situation, you may have expenses that qualify you for tax credits and deductions. If you have any potentially tax-deductible expenses, you should designate sub-files within your accordion system for each different category of deductions and expenses, such as charity, business, medical, etc. Even if you're unsure as to whether or not your expenses are eligible for tax deductions, it is still in your best interest to organize your records in this manner. Hang on to all mortgage statements, medical receipts, utility statements, travel documents, charitable contributions, and any other paperwork for purchases that could potentially qualify you for a deduction at tax time. Keep a cover sheet to write down each item before you slide it into the appropriate file folder.
For the average taxpayer, investment documentation is quite possibly the most complicated type of tax record, since many investment activities are reported to the IRS only when an investment is disposed of, rather than on an annual basis. For this reason, you should create the following three sub-files within the "Investments" section of your filing system:
If you are unsure of which sub-category an investment falls into, you can create a separate sub-file for records that you have questions about so that you can discuss them with your tax preparer at tax time.
Importance of Regular Up-Keep
Since tax season comes at the same time every year, there is no justifiable reason for you to be unprepared. By implementing the tax preparation system recommended here and spending only a few minutes maintaining it each week, you can stay organized throughout the year, making tax time a breeze.
This guest post was provided by Manny Davis. His website contains a frequently updated tax tips blog that provides tax news, tax changes and tax saving advice, as well as detailed guides to IRS tax solutions to help taxpayers resolve various tax-related problems.
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