This is the time of year when we often say to ourselves, “If only.” “If only I had done a better job of organizing my records filing taxes wouldn’t be so tedious.” The key is to create a filing system to organize your tax records at the beginning of the year, and to file paperwork as needed throughout the year. Most tax records fall into the categories of income or deductions.
Organize Sources of Income
Organizing paperwork into files will save you time, money and frustration. Keep files for W-2 Forms, 1099 Forms, social security, pensions, bank statements, brokerage statements and any other sources of income. Why? Your records help identify the sources of your income. You can separate business from other income and taxable from nontaxable income. Since many tax records come around the beginning of the tax year, keep a separate file for the current tax year where you can easily access it.
Keep Track of Expenses to Maximize Deductions
The IRS allows you to deduct on certain kinds of expenses from your income. To deduct expenses you need to be able to prove the expense with a receipt, cancelled check, credit card statement or other proof of payment. Deductions may include mortgage interest, property and real estate taxes as well as moving expenses, charitable contributions and contributions to IRAs. Interest on student loans and medical expenses may also be deductible.
Record the Cost of Property and Home Improvements
Save documents verifying the original cost of your property as well as records of the cost of any improvements you made. Why? You need this information to determine if you have a gain or loss when you sell your home or to figure depreciation if you use part of your home for business purposes or for rent. Your records should show the purchase price, settlement or closing costs, and the cost of any improvements.
How Long Do I Keep Tax Paperwork?
The law states that you must keep your U.S. tax returns indefinitely and your tax records for seven years in case of an audit. I encourage clients to store supporting documentation with their tax return. Consult with a tax professional to learn what deductions you qualify for so you will have the documentation you need. Keeping accurate records is one way to ensure you aren’t giving Uncle Sam any more than he’s entitled to. It also gives you the peace of mind that if the IRS does come knocking, you’ll be ready.
Get rid of that “if only” feeling. Today is the day to start organizing for next year.