You can make this year’s contact with Uncle Sam less stressful than ever before by organizing your tax information. It may take a little time to establish a system, but in the end you can save time, aggravation, and money.
Keep your filing system simple
There is no need to hire a professional organizer or to develop an elaborate filing system. The key to sticking with a process is to make it simple. First, establish a central location, such as a locking desk or file cabinet, for your records. For your computerized records, set up a password protected folder in a dedicated location on your PC. Make frequent backups of your information.
Use a separate labeled folder or envelope for every tax category
Having a folder for each category makes filing the information throughout the year easier and tax preparation much smoother. To start, check the return you filed last year. It will tell you what categories you need to establish. Common categories include income information (W-2s, interest income, rental income, alimony, child support, etc.), mortgage (interest) information, student loan (interest) information, medical expenses, educational expenses, charitable donations, investments, checking/savings accounts, and so on.
Designate a place to keep all receipts
As you collect receipts, put them in a particular spot in your wallet or purse. Make it a regular routine to empty the receipts from this spot and store them in your files or record them in a tax-related spreadsheet or money tracking program.
Make a file folder for each tax year
File each year’s Income Tax Return along with the tax documentation for that year's filing (W-2s, 1099s, statements with annual interest charges, Profit & Loss statement or manual account summaries, etc.) Knowing what happened in previous years makes things easier in subsequent years.
No need to keep everything
Record keeping includes record purging:
- It's a good idea to keep tax returns and all supporting documents for at least seven years. The IRS has three years to charge additional taxes and six years to do so if they have reason to believe you underreported your income by 25 percent or more. Some experts suggest holding on to the actual returns (not all the supporting documentation) indefinitely because your returns provide a history of your finances and peace of mind!
- Keep investment records for as long as you hold the investments, plus at least seven years. You need records of your gains or losses.
- Real estate records, including purchases, renovations and sales, should be kept until you sell the house and deal with any tax consequences.
Remember: When you're ready to discard documents that show your Social Security Number or other important information, run them through a shredder. Don't expose yourself to identity thieves.
The IRS offers a booklet, "Recordkeeping for Individuals," which will help with tax-related records. You can download it from www.irs.gov or order a copy by calling 1-800-829-3676.