Completing your tax return can leave you feeling like you're buried under piles of paperwork because of all the numbers you have to gather from different sources. You'll have W-2 forms, 1099s, charitable contribution receipts, annual account statements, mileage logs, and maybe even business receipts. You don't have to send these in when you submit your tax return through OnePriceTaxes, so what do you do with the piles of paperwork? This week, we are going to take a look at the best ways to organize a filing system to store all the documentation that supports your tax return.
Set aside a space
Before you work on filing away all your paperwork, you'll need somewhere to put it. Rather than trying to stuff everything in an overcrowded drawer in your existing filing cabinet, consider creating a separate location for your tax documents. A fire proof safe is ideal because you may need to show copies of these files later, and you definitely don't want to lose them. If you don't want to invest in a safe, at least get a filing cabinet that locks so you can protect your sensitive financial information. Just make sure someone else knows where you keep the key in case something happens and others need to access your tax files.
Create clearly labeled categorical folders
You'll have a lot of paperwork, and you want it to be organized so you're able to find exactly what you're looking for when you need it. Start out by creating clearly labeled folders for each type of item you're storing. The exact labels on the folders will vary depending on your situation and the types of documentation you have. For many people, they will include categories like W-2s, 1099s, charitable contribution receipts, invoices, home and mortgage documents and receipts, retirement account contributions and distributions, loan interest, education costs, and taxes paid. Once you've created the folders, group them together in a larger folder labeled with the year. Alternately, you can choose a different color of file folders for each year you're storing. Repeat this process for each year of tax documentation you're organizing.
Store current year documentation as you go
As you're creating your filing system, you can get a jump on next year's tax preparation by making space to store documentation as you go for the upcoming year. Use the same types of folders, and just file paperwork away as you receive it. When it comes time to do your taxes next year, you'll already have everything you need right at your fingertips and sorted into relevant categories.
Archive folders after preparing taxes
Preparing your taxes with organized documentation is easy, especially when you use OnePriceTaxes. When you're done, you'll need to hold on to the documentation in case you need to show it to prove income or expenses later. Particularly if you're claiming tax deductions or tax credits on your return, you will want to have the documentation filed in case you get audited. If you're ready with your archived folders, an audit won't have to be scary or stressful at all. When you're archiving, make sure each set of folders is clearly marked with the year so you know exactly where to find documents.
Store tax records for at least three years
The IRS statute of limitations lasts for three years, so this is the minimum length of time you should keep your tax documentation. However, some types of tax documentation must be kept for four, six, or seven years. When in doubt, just plan to hold onto your records for a full seven years after you file your taxes. When seven years are up, you can grab that folder and put everything through the shredder. However, you should hold onto a copy of the actual tax return because the IRS only keeps those for three years, and you or your heirs may need the information later. In addition, you should keep information about assets you own, like your home or pieces of business equipment, until you sell them.
Consider electronic backups
Does the idea of storing a full seven years of tax documentation in your home make you feel like you're going to show up on an episode of a reality TV show about hoarding? The good news is that the IRS accepts clear electronic copies in place of original paper documentation. Therefore, if you have a scanner, you can lighten the load of your filing cabinet or safe by scanning in all of your documentation and storing it electronically. In addition to keeping copies of the files on your computer's hard drive, consider storing them online through a cloud-based storage system so the files are safe even if your computer crashes.
The time you put into creating a filing system for your tax documentation will save you both time and money down the road. Because you'll have all the paperwork at your fingertips, you won't miss out on any of the tax deductions or tax credits you should be able to claim. Don't let the scale of the task intimidate you because it's really quite simple once you get started. Just take the process one step at a time, and before you know it, you'll have a streamlined storage system for all of your tax documentation.