Having just gotten over the pain of collecting the required data for preparing (or having prepared) your tax returns, you may be thinking: “I don’t want to go through that again!”
An easy-to-use system for organizing and managing all your key personal, financial, and tax-related information can pay off all year long - not just during tax season.
I do recognize that we are in the beginning of summer and addressing your filing system, or lack thereof, may not be on your radar screen. However, if you want to avoid the specter of stress and missing records next year, June is a good time to create a more efficient and effective system.
The objective is to create and maintain a filing system that is efficient and simple, helps you find what you need easily, and suits your disposition. You won't only be developing a process; you will be creating a foundation for your peace of mind.
The first section of the article provides general guidelines and the second section, Appendix I, is a listing of the various documents that are generally accumulated throughout the year and need to be ordered and saved.
- Decide whether you will scan, then trash/shred paper or maintain hard copy files. A combination of both methods can be appropriate as well.
- Break your overall filing system into major sections, such as Home(s), Vehicles, Investments, Bank accounts, Credit cards, Retirement Plans, Medical, Charities, Income, Expenses, Insurance, and Legal/Estate.
- Within these major sections are subgroups. For example:
- The Home section might contain folders for home improvement receipts, closing/refinance records, and property taxes.
- Folders in the Taxes section could hold the forms received in January and February, such as W-2s, 1099s, and K-1s, estimated tax payments, along with the last three of tax returns – US/state.
- Medical groupings would include policy benefits/coverage, claims, receipts for service, and Explanation of Benefits (EOBs).
- At the beginning of each year, prepare a folder for every document type. File each item into it as soon as it is received or work on it is completed. Create a process for archiving these files at the end of the year.
- Review, reconcile, and pay, then file statements (bank; credit card; investment, and tax) - monthly, quarterly, or annually as applicable.
- If you have a home-based business and use personal assts in your trade or business, the additional files listed below are essential:
- Receipts, invoices, bills, and statements (bank and credit card) - everything that substantiates the amount and business purpose.
- Some deductions for personal property used for business such as a car, computer, or cell phone are limited to the percentage of time these are used in the business, so track/file that info.
- Records that indicate the business use of your home and expenses related to that use.
- If you use a car for business, maintain a vehicle log with date, destination, and purpose of each trip along with total miles for business, commuting (to work location or office), and personal.
- Business property purchased and contributed, such as furniture/fixtures; vehicles; equipment/tools; computers; software; leasehold improvements; and websites/other intangible assets:
I can’t stress enough the importance of creating a well-organized filing system. Now is the time to take a few minutes to do a quick assessment of how well your current systems are working - or not.
Think of this task as an investment in you and your well-being. I just know that you’ll be pleased that you did!
Below is a list of the various types of income-related information, which may exist in a combination of hard copy form as well as electronically. Regardless of the filing method, the data should be saved and filed in a manner that will allow for easy access when it’s time to prepare your income tax return.
- W-2s, if receive salary/wages
- 1099-MISC, if self-employed or a single member LLC
- 1099-INT, DIV, and B for interest, dividends, capital gains, & security sales
- K-1s for income from partnerships, S Corps, and trusts
- 1099-MISC for rental and royalty revenues
- 1099-S for real estate transactions
- 1099-R for any retirement and pension plan distributions
- Commissions, stock options, bonuses, and large gifts received
Below are examples of data to gather. Check with your CPA for deductibility.
- Mortgage interest payments
- Property (real & personal) taxes
- Investment advisory fees and margin interest
- Health and LTC insurance premiums for self and family
- Medical expenses: Doctors/dental, Prescriptions, labs/tests, equipment, travel
- Retirement plan contributions
- Estimated tax payments to federal/state/city taxing authorities
- Receipts/letters for all charitable contributions
- Insurance: Property & Casualty, liability, and homeowners/rental
- Bank fees & credit card charges
- Home office: Include home purchase date/price, date/cost of all home improvements, land value, total home square footage, and office space size - for the length of time you live there. Costs=Insurance; repairs; Internet; maintenance (housekeeping, security, pest control, mowing/snow removal, carpet/chimney/window cleaning, condo/coop/HOA monthly fees); and utilities
- Vehicle records, if car used for business: Save information regarding purchase date; cost (including sales tax and shipping); date first used in business, year/make/model; monthly lease payments or loan interest; costs for fuel/oil; auto club dues; registration fees; insurance; maintenance; tires; tools; washes; state inspections; garage rent; parking; and service/repairs
- Telephone: landline, fax, and mobile (% of business use)
- Business Travel: airfare, train, lodging, car rentals, taxis, tolls, and parking