by Jennifer Swanson
Whether you hire someone to prepare your income taxes or do it yourself, you have to get your tax records organized or you risk making costly errors. The ultimate goal is to correctly determine your tax and easily support your claims if audited. The added benefit of creating a good organizing system now is that you can easily duplicate it every year.
Here’s a simple, reliable system to get your personal income tax paperwork organized-and keep it that way.
First, collect everything having to do with this year’s taxes. Look everywhere. If you get discouraged, remind yourself that you’re creating a system so that you never have to do this again.
Warning: Now is not the time for a full file system overhaul. If the rest of your paperwork needs to be organized, resist the temptation to be distracted. Promise yourself you’ll get to it in due time. Then tell that renegade piece of paper, “It’s not your turn!” and go back to your tax project.
Second, sort the papers into general categories. To speed the sorting process, label each pile as soon as you create it. Most people can start with broad categories such as “Forms/Instructions,” “Deductible Expenses,” and “W-2’s/Year-end Statements.” You’ll also want a category for “General Info” such as phone numbers and helpful articles like this one.
If you find these categories to be too broad, create smaller subcategories. For example, expand “Deductible Expenses” into “Childcare Expenses,” “Medical Expenses,” “Charitable Donations,” etc.
You’ve probably heard the decluttering maxim, “When in doubt, throw it out.” Tax records are the exception. If you use computer software to keep financial records or file your taxes electronically, be sure to save a backup copy on disk and a paper hardcopy for yourself and your tax preparer. For guidelines on what to keep and how long to keep it, refer to IRS Publication 552, “Recordkeeping for Individuals,” available at www.irs.gov or by phoning 1-800-829-3676.
Third, label your files. Now that you’ve sorted everything into labeled piles, get ready to pull it all together into a neat-looking system.
You’ll need standard green hanging file folders and 1/3-cut, reinforced, manila file folders for your file cabinet or box.
Before you label the manila file folders, think about the way you position the folder tabs. Rather than setting up folders in the “left, center, right; left, center, right…” pattern (which creates trouble when you need to add a file later), give meaning to tab placement.
For example,
- Left tab: any files with general information that you could use again in future years (this would probably be just the “General Info” file).
- Center tab: all files specific to this year’s taxes (e.g., “Forms/Instructions,” “Deductible Expenses,” etc.).
- Right tab: completed tax returns and supporting documentation from previous years.
(For details on using this tab placement system in the rest of your files, see File Anything in Your Home...And Find It Again! by Mary Anne Lessley and Katherine D. Anderson).
Label the manila folders and drop them into the green hanging files, using as many green hanging files as you need to hold the manila folders. Put them in order, label the first hanging file “INCOME TAXES,” and you’re done!
Take a couple of minutes to get ready for next year’s tax documents. After all, you’ve already done the work of setting up the system, and your supplies are right in front of you. Simply drop your tax-related papers as they enter your home into your files, and you’ll relieve a great deal of tax season stress.
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