For many Americans, March and April are dreaded months that are filled with tracking down receipts and documents in preparation for tax time. Whether you do your taxes yourself, or hire an accountant, keeping your documents organized will reduce errors and the time needed to complete your taxes. I recommend trying to keep everything in one place, such as a binder, folder, large manila envelope, file folder, or tray on your desk, depending on your needs. In this article, we explore how to implement a folder system for organizing tax documents throughout the year.
Our Best Tip: Use Labeled Manila Envelopes or Folders
Tax deductions are classified into specific categories. Use these to your advantage by sorting your tax papers into manila envelopes labeled with the category names. Once you’ve got your envelopes marked sort your receipts and other papers into the appropriate category. The most commonly used types are:
- Income: Pay stubs, W-2s, 1099s, interest statements, dividend statements. Also, include jury duty pay.
- Medical expenses: Receipts from doctors, dentists, hospitals, labs, pharmacies, vision centers, etc. Also receipts for any payments made to purchase health, dental, and vision insurance.
- Charitable donations: Include receipts for cash donations, as well as donated items (clothes, toys, cars, etc.).
- Real estate papers: Year-end mortgage interest statements, real estate tax documents, home owner’s insurance receipts, and other paperwork associated with casualty losses to your home. If you made home improvements, include their receipts here. They may/may not be tax deductible (talk to your financial advisor), but at least you’ll know where they are.
- Property and sales tax papers: Receipts for paying taxes on cars and other vehicles subject to personal property tax. Also, sales receipts for big-ticket items.
- Child Care payments In addition to receipts for payments to daycare or sitters, be sure you have paperwork with your babysitter’s contact information and Social Security number if you paid him/her to watch your child while you worked or looked for work.
- Student loan payments: Any papers related to payments made and interest charged.
- Work-related expenses: Receipts for work-related costs not reimbursed by your employer (e.g., work-related educational expenses, receipts for union dues, professional license renewal fees, tools or supplies required for your job, etc.)
- Self-employment expense receipts (if applicable, make separate envelopes for each of these): Receipts for advertising, office supplies, office cleaning, office repairs, employee pay, payments to contractors, business-related meals and entertainment, professional licensing fees, business travel, equipment purchase or rental, and contributions to SEP-IRAs, SIMPLE IRAs and solo 401(k)s.
- Utility bills for home-office deduction (if applicable): If you qualify for a home-office deduction, you’ll need your home’s utility bills to calculate the amount deductible from your taxes.
The best part about this process is that if you organize everything once, you can easily use the folder throughout the year to collect your tax documents as you accrue them. Now, when tax season rolls around your paperwork is already sorted; all you have to do is calculate expenses and enter them on the tax form!
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