When it comes to tax documents, I’m an extremist: they’re either a sack of disorganized papers or single pieces of paper hyper-filed in too many neurotically labeled folders. The ideal organization lies somewhere between those extremes, so I’ll approach the problem like the realistic, well-organized person I’ve never been. It will come as “zero” surprise to you that this is not fun. However, it should make tax return preparation somewhat easier. Ideally, you should start this labeling and filing on January 1st of each year and regularly place documentation in these files throughout the year. If you’re like me, you’ll be doing most or all of this on April 15th with inventive cursing.
First, buy a box of tabbed manila filing folders, which cost $6 - $7/per hundred. You will then need to label and fill files according to categories in an income tax return. You will often be interested in “proof of payment,” which can include but is not limited to sales slips, invoices, financial account statements, credit card statements, receipts, payroll deduction statements, copies of electronic funds transfers, canceled checks, and substitute checks.
Second, label one file “Income” and put all your pay stubs, 1099’s, 2439’s, W-2s, bank statements, statements of interest, brokerage statements, mutual fund statements and/or dividends into that file.
Third, label a file “Medical and Dental Expenses” and put all your receipts, canceled checks or other proof of payment for health insurance and out-of-pocket medical and dental expenses into that file. In addition to direct payments for medical/dental care, those expenses include but are not limited to: the standard mileage rate, of which you should keep a log; parking fees, tolls, taxi fares and bus fares.
Fourth, label a file “Real Estate” and put any closing statements, purchase and sales invoices, proofs of payment, insurance records, home improvement receipts, tax assessment statements and proof of interest payments into that file.
Fifth, label a file “Advance Payments” and file any records of advance payments of the tax credit under the Affordable Care Act.
Sixth, label a file “Federal Tax Correspondence,” and put any letters, notices, or printed e-mails between you and the IRS.
Seventh, label a file “State Tax Correspondence,” and put any letters, notices, or printed e-mails between you and your state taxing authority.
Eighth, label a file “Contributions/Donations” and put any correspondence, receipts or other proof of donations – whether in cash, clothes, or other property – into this file.
Ninth, label a file “Tax Returns” and put your Federal/State tax return copies into this file in chronological order.
Tenth, label a file “Student Loans” and put proof of interest payments on your student loan(s) into this file.
Eleventh, label a file “Educational Expenses” and put any proof of periods of enrollment and proofs of payment of tuition, books, and other educational expenses in that file.
Twelfth, label a file “Child Care” and put all proofs of child care expenses (such as child support) into this file.
Thirteenth, label a file “Alimony” and put your written agreement or separation/divorce/support decree and proofs of payment whether you pay or receive alimony.
Fourteenth, label a file “Casualty and Theft Losses” and put proofs of the loss and of the amounts lost.
Fifteenth, label a file “Exemptions” and put written proofs support an exemption for your spouse or dependent(s) in that file.
Sixteenth, label a file “Business Income” and put the various documents proving your business income into this file.
Seventeenth, label a file “Business Expenses” and put the various documents proving your business expenses into this file. If you use your home for business, these proofs will include records showing the part of your home used for business and the related business expenses. If you have employee business expenses, these proofs will be related to travel, entertainment, gift, and car expenses.
Eighteenth, label a file “Business Tax Documents” and put all correspondence & Federal/State tax returns into this file in chronological order.
Nineteenth, label a file “Energy Incentives” and keep proofs of purchase of energy-efficient products in this file.
Twentieth, label a file “Gambling Winnings and Losses” and keep notes and proofs of winnings and losses in this file.
Twenty-First, if you have a Health Savings Accounts (HSA) or a Medical Savings Accounts (MSA), label a file “HSA” or “MSA” and keep records of payments made from these accounts for medical expenses in this file.
Twenty-Second, label a file “Individual Retirement Accounts (IRA)” and keep: Form 5498, IRA Contribution Information or equivalent statement received to show contributions, distributions and value; Form 1099-R showing distributions from pensions, annuities, retirement or profit-sharing, IRAs, Insurance Contracts, etc.; Form 8606, Nondeductible IRAs, for each year you made a nondeductible contribution or received distributions.
Twenty-Third, label a file “Miscellaneous” and put any additional receipts/proofs of payment you deem possibly deductible into this file. Those might include unreimbursed moving expenses, for example.
Twenty-Fourth, after you’ve labeled, and filled all your files, alphabetize them by label. Then, LET THE TAX RETURNS BEGIN!
DO’S AND DON’TS
DO buy a box of tabbed manila filing folders.
DO label and fill files according to categories in an income tax return.
DO remember that “proof of payment” can include but is not limited to sales slips, invoices, financial account statements, credit card statements, receipts, payroll deduction statements, copies of electronic funds transfers, canceled checks, and substitute checks.
DO label and file your documentation according to:
b. Medical and Dental Expenses;
c. Real Estate;
d. Advance Payments;
e. Federal Tax Correspondence;
f. State Tax Correspondence;
h. Tax Returns;
i. Student Loans;
j. Educational Expenses;
k. Child Care;
m. Casualty and Theft Losses;
o. Business Income;
p. Business Expenses;
q. Business Tax Documents;
r. Energy Incentives;
s. Gambling Winnings and Losses;
t. Health Savings Accounts (HSA) or Medical Savings Accounts (MSA);
u. Individual Retirement Accounts (IRA);
DO alphabetize your labeled files;
DO let the tax returns begin!
DON’T be intimidated by the process or the people.
[Note from HandelontheLaw.com: This article is to be used as an educational guide only and should not be interpreted as a legal consultation. Readers of this article are advised to seek an attorney if a legal consultation is needed. Laws may vary by state and are subject to change, thus the accuracy of this information cannot be guaranteed. Readers act on this information solely at their own risk. Neither HandelontheLaw.com, or any of its affiliates, shall have any liability stemming from this article.]
Note from HandelontheLaw.com: This article is to be used as an educational guide only and should not be interpreted as a legal consultation. Readers of this article are advised to seek an attorney if a legal consultation is needed. Laws may vary by state and are subject to change, thus the accuracy of this information can not be guaranteed. Readers act on this information solely at their own risk. Neither the author, handelonthelaw.com, or any of its affiliates shall have any liability stemming from this article.