Getting organized for tax season

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Published on Saturday, 23 February 2013 13:13

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Avoid the last-minute rush and have what you need when you need it

Are you one of those taxpayers surrounded by a mound of receipts, bank statements, canceled checks, and aspirin the night before your income tax returns are due? Fear not. There are some simple steps you can take now to get organized so you’re not in panic mode this April.

The benefits of developing a simple system to keep your tax records organized and easily accessible are many. The Minnesota Society of Certified Public Accountants (MNCPA) says that you’ll not only save time and energy when it’s time to actually file, but you’ll also increase the likelihood that you’re maximizing all of the deductions available to you and minimizing your tax liability. Lost receipts mean lost deductions and, ultimately, you’ll pay more. The MNCPA offers the following strategies to get organized.

File it

A shoebox full of receipts and Popsicle sticks with notes on them isn’t too far from the truth for many people’s tax filing systems, unfortunately. While this makes for a hilarious image, it also makes for disorganization and confusion. Right now, in preparation for filing your income tax returns this April, set up a system of folders into which you can organize your paperwork. While you’re at it, go ahead and make files for the 2013 tax year since we’re already into it anyway. Just keep dropping your paperwork into the appropriate files so you avoid cowering under a tower of crumpled receipts in April.

How many files you create is up to you, but at the minimum, many Certified Public Accountants (CPAs) suggest:

• Income: This is everything you receive that is reported to the IRS (salary, dividends, interest, self-employment earnings). If you really want to take your organizational efforts to the next level, write all income sources and amounts earned on a sheet in the file as they occur. A few extra minutes now can save you hours down the road.

• Expenses and deductions: If you want to itemize deductions on your return, you’ll need to have the proof to back them up. If you have a lot of deductions, you may need to divide this group into smaller categories, such as charitable deductions, child-care costs, mortgage statements, medical bills, etc.

• Investments: Don’t make the mistake of only including your year-end statement, because you may need to give a record of your account activity. Consider separate files for deductible/tax-
deferred investments, nondeductible investments and taxable investments.

Depending on your personal financial situation, you may also want to consider creating files for last year’s tax return documents, canceled checks and credit card statements.

Electronic records?

Wondering what to do in this era of online banking and bill paying? Many banks promote these services as a way to keep your tax records online and in one place. Even if you keep your records electronically, you should still have a system for retaining and organizing your information. If you pay a bill online, print a confirmation statement and file it in lieu of a canceled check. If you’re trying to go paperless, you can save scanned documents to your computer’s hard drive, but be sure to back them up. You should also encrypt your financial information for safety. 

Although creating a simple file system for your tax documents may seem very low-tech in our high-tech world, it’s an easy way to get and stay organized throughout the year.

Keep or toss?

Over the years, even using the file system, your paperwork is going to accumulate. What can you throw away and when? 

Tax experts recommend keeping records that support items on your tax return for at least three years after that tax return has been filed. Examples include bills, credit card and other receipts, invoices, mileage logs, canceled, imaged or substitute checks or other proof of payment, and any other records to support deductions or credits claimed. You should typically keep records relating to property at least three years after you’ve sold or otherwise disposed of it. Examples include a home purchase or improvement, stocks and other investments, Individual Retirement Account transactions, and rental property records. 

A CPA can help

Some people will find they can easily keep themselves organized with the three-file system. As your tax situation grows more complex, however, you may find that you have questions on the best way to handle your taxes. To ensure you’re maximizing your deductions and adhering to the Internal Revenue Code, don’t hesitate to call in an expert for advice. A CPA can make sense of complicated tax situations and make sure you don’t overpay the IRS or state taxing authority.

If you want to make the best financial decisions all year long, whether they pertain to insurance, savings, investing or taxes, consider retaining the services of a CPA for your peace of mind.  Need help finding a CPA? Visit mncpa.org/referral to locate one in your area. You can also visit the MNCPA website at mncpa.org for great financial planning advice and tips.