Tax Insights

Your Guide to State, Local, Federal, Estate + International Taxation

How to get organized for tax time

The kids are finally going back to school, and you uncover an unruly pile of paper accumulated during the year that you will need for your tax return. “Oh, how I wish I had a better way to organize these records!” you mutter under your breath. Well, it’s never to late to start, and certainly a good time to get ready for next year. The three-folder tax filing system may help you kick the “pile it and file it later” approach, and organize your records.

Don’t miss: Why do I get so many tax forms?

Folder 1: Income
Use this folder to hold every penny that you earn during the year:

  • Wages
  • Interest
  • Dividends
  • Distributions
  • Sale proceeds
  • Jury duty payments
  • Gambling winnings

Keep a cover sheet in the folder and list all income sources and the amounts earned as the year progresses. After year-end, when the 1099s and W-2s arrive, verify the income on your cover sheet.

Folder 2: Expenses and deductions
Use this folder to hold receipts, cancelled checks, statements, etc. for all your deductible expenses such as:

  • Medical expenses
  • Charitable donations
  • Income tax payments
  • Real estate tax payments
  • Automobile registration
  • Mortgage and investment interest payments
  • Child care receipts

If the paper in this folder is overwhelming, you may consider creating a separate folder for some of the larger categories and summarize the deductions as the year progresses on a cover sheet.

Folder 3: Investments
Use this folder to retain purchase receipts, sale confirmations, dividend notices, investment statements, proof of securities received as a gift, etc. Separate folders may be helpful to organize your investment paperwork by how it is taxed:

  • Deductible/tax-deferred investments: Include records that prove your annual contributions to qualified retirement plans, Roth IRA contributions and IRA distribution records.
  • Nondeductible investments: Include records for IRA contributions that are not eligible for preferential tax treatment.
  • Taxable investments: Include statements or confirmation slips that prove the cost basis of your investments (reinvested dividends, mergers, 1099s and K-1 forms). You may want to create a separate folder for each stock or brokerage account.

If you have a business or rental property, you may want to keep a separate folder to file receipts for the income and related expenses. A cover sheet recording the income and expenses as the year progresses may also be helpful to retain in this folder.

How long do I retain the records?

One of the biggest mistakes some people make is keeping too much information. There is simply no need to hoard records related to nondeductible expenses, such as personal phone and utility bills, canceled checks, credit card statements and the like.

Keep all documents that relate to your current year income and deductible expenses. For federal tax purposes, hold on to these records for at least three years (some states may require four years) from the date you file your return. You should normally keep records relating to property until at least six years after you sell or otherwise dispose of the property. Examples include home purchase or improvements and stocks and other investments. Retain copies of tax returns and records for nondeductible contributions made to an IRA indefinitely.

For a complete a more in-depth list of how long you should keep certain documentation, check out our record retention guidelines.

 

Pamela Wheeler, EA