Tax season is upon us and it is never too late to start getting your tax paperwork organized. Even if you feel like it is too late for last year’s receipts, you can certainly put a system in place for this year.
According to the IRS, “Well-organized records make it easier to prepare a tax return and help provide answers if your return is selected for examination, or to prepare a response if you receive an IRS notice.”
A good starting point is to save your receipts into a box every time you buy something. You can sort them on a weekly basis so you are not overwhelmed at tax time next year. It is important that any deduction have a receipt to back it up.
How do you know what to save?
Paperwork should be divided into three categories: income, expenses and investments. Using separate containers or an accordion file, you can divvy up the receipts. When it comes time to do your taxes, everything will be pre-sorted and in one location. Yes, there are more elaborate ways to sort and file your receipts, but sometimes ‘less is more’ and if they are all in one location rather than scattered around the house, this is progress – right?
Income includes documents like:
- W2 forms
- checking account interest statement
- alimony received
- rental property income
- gambling winnings
- pay stubs
Expense documents include:
- medical bills
- utility bills
- home business expenses
- property tax documents
- canceled checks
- child care payments
- professional or business deductions
- tax payments made throughout the year
- miscellaneous receipts for other deductions
Investment documents include:
- deductible/tax-differed investments
- non-deductible investments
- taxable investments
Divide all of your receipts from last year and put them into the three categories. Once you have them organized, working on your taxes will be much easier. There is excellent software available like TurboTax and TaxACT, if you want to do your own taxes, or you can take everything to an accountant. Remember that credit card companies normally provide a year end summary of all charges, broken down my category, which makes the process much easier, too.
There is some difference of opinion on how long you should save tax receipts. Most professionals suggest seven years. Hang onto all of the copies of your tax returns, but after seven years you can shred the receipts.
Get a head start on next tax season by putting an organizing system in place and save yourself some headaches in the future.