Tax Time – Organize Early

Tax Day. The mere mention of April 15th can cause a stressful reaction. As the time nears, countdowns appear in many newspapers as to how many days are left before tax day. Thoughts start to wander to the many tax-related items that are in nooks and crannies at home, work, the car…just about anywhere. The necessity of finding it all and sorting through it gains importance as tax day nears. Then deciding to tackle this project must be tackled. Total avoidance is not an option.

Mitzi Weinman, President of TimeFinder, a management training, coaching and professional speaking company, in Needham, MA says, “There are simple steps that, when taken early, will ease tax season and reduce angst. The additional benefit – getting bills, receipts, and statements so organized that you will have a simple, workable model you can use year after year.”

The biggest mistake individuals make in their tax return preparation is procrastination says Sandra LeDuc, partner in the accounting firm LeDuc and Sikowitz in Boston, MA. According to Ms. LeDuc, “Organizing your data early and getting a jump on the process allows you to plan for payments due on the return and get refunds early.”

The primary focus of this article is for personal tax preparation. When running a business, information should be kept separately. Hiring a bookkeeper or accountant to do the record keeping, is suggested unless a business is small enough for the owner and/or manager to do the accounting themselves.

Getting Ready

1. Designate an easy to access file drawer or buy a plastic storage crate or box for tax information.

2. Categorize file folders or one folder to hold relevant tax information.

Examples of tax-related folders include:
_____ Charitable contributions
_____ Mortgage receipts
_____ Real estate tax bills
_____ Excise tax bills
_____ Yearend investment statements
_____ 1099’s
_____ Records related to household help (for whom you pay taxes)
_____ Childcare expenses
_____ Medical expenses (determined at time of tax preparation if deductible)


3. Use a software program like Quicken or Microsoft Money for tax and financial management.


Day-to-day

1. Open mail over a wastebasket.
2. File the items that are relevant to tax matters in the appropriate files as bills are paid and “important” mail is opened.
3. File the other items accurately.
4. As bills are paid, make entries into an electronic or non-electronic check register.
5. Pull the tax-related canceled checks and file them appropriately when reconciling monthly bank statement.


What to keep and How long to keep it

Forever

Old tax returns
W2 and 1099 Forms – Keep with your tax return
Closing statement for personal residence or other real estate

Up to 6 years

Tax-related canceled checks. Canceled checks constitute actual proof.
Statements from investments.
Mortgage statements.
Canceled rent checks.
Sales receipts pertinent to tax items.
Credit card bills - as tax records if deductions are taken for items on them.
Yearend summaries from credit card companies if tax records.

Up to 3 years

Bank statements

Up to 1 year

Paycheck stubs - Until W2 is received and deemed correct


Monthly

ATM/Deposit slips – Until bank statement is reconciled

To help you more effectively work with your tax preparer, Laura Kenney, a senior manager at the accounting firm GrantThornton in Boston, suggests creating a folder for questions or articles pertaining to taxes. When you talk to your accountant, you will be prepared, focused and able to get your questions answered without trying to remember what you heard or read somewhere.

There’s a saying, “When in doubt, throw it out.” When it comes to keeping records, Weinman says, “When in doubt contact your accountant, attorney, or financial professional.”

Weinman concedes, “Preparing for taxes still may not be your favorite annual event but perhaps next tax season, it won’t be so bad and you can marvel at how quickly you accomplished what for years has taken so long.”

The content of this article is meant for informational purposes but does not constitute tax, financial or legal advice. Consult a tax professional regarding the length of time to retain documentation that would be applicable to a specific case.