Organizing Your Tax Records Throughout the Year

This is a guest post from Mike of CleverDude. If you like what you see here, please consider subscribing to his RSS feed.

Back in college, I had one W-2 each year, no investments or additional income, and I just took the standard deduction. I didn’t really need to think about taxes until tax time came around. But now that I’m older, things are a bit different.

We still don’t have the craziest tax situation, but I do have at least a dozen different pieces of paper that have important numbers, not counting receipts. I run two businesses, and both my wife and I have day jobs. I’m not the best organizer, and it’s beginning to show. And that’s why I want to share a little tip with all of you this tax season. Begin filing your tax-related documents NOW rather than waiting till next year.

Step 1 – Set up a filing system
For us, I have a single folder called “Tax Documents, ” and whenever I get anything that could be considered income or a deduction on next year’s return, I stick it in the folder. For instance, receipts from business meals, website hosting, malpractice insurance premiums, and anything else that probably won’t get mailed as a single statement early next year go into the folder. Last year, I found that a single folder worked fine for us, but this year I’ll have to revise the system.

Since we’re now launching a third business (a nutrition consulting business, as my wife is a licensed and registered dietitian), and we’ve already had some expenditures, I need to begin splitting personal expenses from business expenses. That means a few more folders, and maybe some envelopes for the smaller items like receipts. There are pre-made systems for sale out there, but a manila folder will do just fine.

Step 2 – Create a reference sheet
It’s great that you’re filing all your stuff into one or a few folders, but how do you know what’s in there? Last year, since we only used a single folder, I just wrote what I added to the folder right on the front of the folder. I actually made categories like income, expense, investments, etc. and would just write in the document name or description in the appropriate category. Next year, I’ll probably do the same. But for those of you with more receipts and documents than us, you may want something a little more complex than a marker — but don’t think that you need to spend money on something! All you need is a sheet of paper or maybe a spreadsheet application to keep track of your documents.

Step 3 – Uh, I don’t think there is a step 3
The system you use doesn’t need to be overly complex. Actually, the simpler, the better. The goal here is to keep track of your records as soon as you receive them rather than letting them float around and potentially get lost. Keep everything tax-related together throughout the year and you’ll find tax time much less stressful each year.

So this year, if you found yourself scrambling to find all those receipts from last January, try out this method. I’ve learned that we each have our own ways to organize things, but the important thing is to at least do something!

10 Responses to “Organizing Your Tax Records Throughout the Year”

  1. Anonymous

    The “shoebox” is fine as far as it goes. However, before I pitch the receipt/document into the shoebox, I enter it on my tax ss. Basic Excel skills! Set it up after doing taxes one year so you can see how to record your information so it meets the requirements of your tax software or the forms you file. Mine is pretty much in the same order as the Schedule A and other forms. Basically, state tax refund, medical, vehicle registration taxes, charitable contributions (money, in-kind, mileage), unreimbursed business expenses following that form, including counting up my business mileage and commuting days…I mark my calendar with a reminder to do this at the end of each month. Also I have a section for education related expenses.

    It sounds complicated but it isn’t, it grew organically from learning from my tax prep each year. I have just basic Excel skills and like the computer to do the math for me to avoid simple math errors.

    I store the documents in a little drawer in a desktop “chest of drawers” organizer…and each category is paper/binder-clipped together: business, education, charitable, health/medical, etc.

    Takes very little effort and makes tax prep painless! I used to hate slogging through the shoebox and the calendar at tax time trying to make sense of the chaos. I would file extensions to procrastinate on doing it. A little work steadily throughout the year makes life so much easier.

  2. Anonymous

    I agree… the simpler the better. Anything that requires you to prepare up to a year in advance needs to be simple or you won’t stick with it.

  3. Anonymous

    Ah! I like your reference sheet idea! In fact, I’m going to make one for my tax person this very morning.

    I just clip all the W-2s, 1098s, 1099s, 549s, and K-1s together in their respective little stacks inside a manila file folder. Then I print out a Quicken category report–because I charge everything and enter every transaction in Quicken, it creates a detailed summary of all my income and tax-relevant expenses.

    And I’m with Kyle in wishing this stuff were available electronically. Also that the government would put some teeth in the rule that people have to get tax documents to you by the end of January! I’m still waiting on a K-1. The chuckleheads who run the limited partnership in question ALWAYS wait until the end of March to send them.

  4. Anonymous

    I’d prefer if there were some sort of electronic option to all this. Instead of getting a W-2 and 1099 in the mail, there should be an option to do this all electronically. Maybe the IRS could set up some sort of secure database somewhere.

  5. Anonymous

    I do something similar.
    I use manilla inter-office envelopes (the big 9×13 size) to store my completed tax information (copies of the forms I sent in, spare W-2’s, etc.)

    Each year I take one of those envelopes and put *next year’s* date on it, and keep it in the same file cabinet with the past completed tax information. This is the envelope into which I put all of those receipts, etc. which may be needed for next year’s taxes.

    So when the time comes to do taxes, I grab that envelope – when I start it has all of the info I need to do my taxes; when I am done, it contains the completed tax forms, etc.

  6. Anonymous

    Good summary. Simple is better because simple gets done. No need to over-think this. Incidentally, the same line of thinking works for general personal finance as well.

  7. Anonymous

    Every year I promise myself I’ll do better than the year before, but I never seem to get around to it. Thanks for putting this together – it has motivated me to get things in order for 2008.

  8. Anonymous

    I’ve found that using financial software is a great help. I enter and categorize transactions as they occur. I keep the actual receipts as well but when tax time comes, I can just run a report from the software that gives me the totals from each category.

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