How to Prepare for Tax Season: Organizing Your Tax Documents

There are two things in life that are unavoidable: death and taxes.  And at least, the taxes is something you can do something about.  But preparing for tax day the week before it's due can be stressful.   That's why organizing your tax documents ahead of time is key.

Keeping all of your income and financial paperwork organized can make filing your taxes much easier.  Throwing all of your receipts willy-nilly into a box or an envelope is just not cutting it anymore.  

It's time to put your big girl panties on and pull. it. together.

Getting organized now will save you lots of time and money come tax time.   The time to prepare is always now.  So check out these quick tips for organizing your tax documents and make sure you are ready to go when that deadline approaches.

How to Organize and Prepare for Your Taxes

To stay on top of your taxes this year (and every year to come), you need to set up a dedicated file folder that you will keep organized and up to date with all of your necessary documents.  We'll go over each file folder you need to have as well as how to section them and what to include.

Of course, this is the digital age so we'll also look at some apps you can use to organize your documents later on as well.

You may want to keep your receipts and documents for up to 7 years.  Because if you are audited, the IRS may decide to go back that far.  Typically though, for someone who has not filed for losses, they recommend just keeping your receipts for 3 years after you file.

Permanent File Folder

The first file folder you are going to need when organizing your documents for taxes is a permanent file folder.  In this folder you will keep all your important life documents such as:

Current Finance Folder

Next, you are going to create a current finance folder or tab where you will keep all of your financial documents and information relevant to the current tax year.

This includes things such as your bills, bank statements, receipts, tax documents, and if you have a business, vendor files.

Your Bills

If you still get paper billing statements, here is where you would want to keep them.  You'll also want to include your payment receipts.  

When filing, make sure you highlight how often you have to pay the bill, its due date, and the amount of interest paid if applicable.  You may want to consider having separate files for each bill and organizing them by due date.

It is important to keep track of interest paid here as some, like your mortgage payments, may be deductible.

Bank Statements

Keep your bank statements in this folder.  To stay on top of your finances, check the receipts from your purchases with what is actually reported on your bank statement.

If there are any discrepancies, alert your bank.  If not, then file the statement and keep the receipts that you will need for your write-offs later.  If you are a freelancer or business owner, this can include purchases for your home office, transportation costs, etc.

If you are a business owner who has different vendors, you will store those receipts in the vendor file folder.

Vendor File Folder

Here is where you'll put all the bills paid and statements related to vendor services rendered throughout the year.  You will also store your vendor-related receipts here too after making sure everything aligns with your bank statements.

Depending on your situation, you may want to create little sub folders for each vendor and separate them by use, having a special folder for those vendors who you only used once.

Current Year Tax File

Your current year tax file is where you'll put all of the important documents you'll need to file your taxes in the coming year.  These documents include 1099 forms, forms from your Charities, W-2 forms, etc.

Real Estate Folder

If you have real estate investments, you have to stay on top of all of your paperwork as filing your taxes will be more complicated.  Here is a list of the things you should keep in this folder:

• Escrow Papers
• Homeowners Insurance
• Proper Tax Paperwork
• Home Improvements File

Under the home improvements file, store your pictures and receipts of major improvements.  Also, keep your receipts from any plumbing, electrical, and AC/heating repairs done as well as any purchases of major appliances such as microwaves, refrigerators, washers/dryers, etc.

Furthermore, you will want to have separate files for each property you own.  And when you sell your property, make sure you move the file to the tax file for the year that it was sold.

For tax purposes, don't forget to deduct all the expenses of maintaining the property from your profit before you figuring out your taxable income or gains.

Investments Folder

When organizing your tax documents, you may want to include a separate folder for your investments.  This can include your investments in your retirement accounts or in your own brokerage accounts.

Be sure to keep all the info pertaining to your investments here such as a file for your broker or financial advisor, when you buy and sell stocks, which funds you are invested in, etc.

One reason to keep good records when it comes to buying and selling your stock is that this can have a significant affect on the amount of taxes you pay.  How?

Well, when you sell your stock, you are typically taxed on the gains (or if there are losses, you can write them off).  But if you wanted to minimize your capital gains and therefore, the tax you'd owe, you could do so by choosing which stock you sold.

For instance, if the stock you own has been steadily increasing over the years from when you first bought it at $25 (last bought at $40) to its current price of $50, you could choose to sell the stocks you most recently bought at $40 to minimize your taxes.   This is known as the Last In First Out method in accounting.

Another way you could choose to sell stocks is the First In First Out method.  The only catch is you must keep careful track of your transactions to do this.

Prior Year Tax Returns

This file is pretty self-explanatory.  Here is where you will keep all of your prior year tax returns.  They could be a good reference when completing your current taxes.  Especially if you have losses you would like to carry over.

But, in particular, you'd want to have these files on hand just in case there is a problem with your tax returns or you get audited.  

The IRS recommends that you keep your tax returns for, at least, the previous 3 years.  However, if you have been writing off losses, you should keep up to the past 7 years of tax returns.  And if the IRS suspects fraud, they may even go back 10 years.

Other File Folders

Everyone's situation is different so depending on what you have going on you may want to consider having extra file folders to keep your taxes organized.

For instance, if you have kids, you may want to keep a separate file for all of their expenses, as there are a number of tax credits and deductions you could qualify for.

Furthermore, you may also want to keep a separate file for any crypto investments you are doing.  For now, it seems to be taxed the same as regular stocks but in the future that may change so you may want to file them separately.

You may even want to consider breaking down your expenses into their deductible categories.  This will save you time later when it comes to filing your taxes.  Here are some of the deduction categories you should consider:

• Home and Office Expenses 
• Vehicle Expenses and Mileage
• Education Costs
• Childcare Expenses
• Medical Expenses
• Business Expenses
• Other Expenses (Moving Costs, Charitable Donations, etc.)

Organizing Your Taxes with Digital Software

In this day and age there are a lot of digital software out there that can help you organize your tax documents and receipts.  So if keeping an old school file cabinet is not to your liking, you are in luck.

You can now scan, take pictures of, and upload your receipts and important documents to your computer.  Then you can use a software to organize and keep track of them.

Let's take a look a few of these apps that could potentially save you lots of time and money when tax season rolls around.

Note: I am not an affiliate for any of these apps.

Shoeboxed

A popular software, Shoebox, allows you to scan your receipts and organize them into categories.  You can even create expenses reports to get an overall view of your expenses.

What's more, you can store business cards, documents, and other forms in addition to your receipts.  Plus, you can integrate Shoebox with many other apps such as Evernote, Quickbooks, Wave, and GoDaddy.

Also, you can use the app to track your miles and have it automatically archive receipts from your Gmail account.  The good news is these digital receipts are accepted by the IRS and the Canadian Revenue Service should there be an audit.

QuickBooks

Intuit's Quickbooks is an accounting software that is geared towards small business owners.  It is one of the most well-known, trusted software out there.  You can use it anywhere and on any device.

It easily connects to your bank and helps you track your income and expenses.  In addition, you can use it to capture and organize receipts, generate invoices and profit and loss statements, track inventory, and more.

Quickbooks is currently starting from a new monthly low of $4.80/month. 

Swipefin

Another app you might want to take a look at for organizing your tax documents (in this case, more specifically, your expenses) is Swipefin.  It has been called the Tinder of tax prep and is geared towards freelancers, small business owners, and contract workers.

Swipefin integrates with over 500 financial institutions so your bank transactions can easily be uploaded.  You can also take pictures of your receipts and upload it that way.  Swipefin makes organizing your expenses fun as it has the same basic principle from Tinder of swiping left or swiping right.  

Here's how it works.  You will be shown an expense that includes what it is as well as the dollar amount.  Then all you have to do is swipe left if it is a personal expense or swipe right if it is a business expenses.

Easy Peezy!

Furthermore, Swipefin can easily be connected to Quickbooks.  The only downside is this app is for Apple users only.

MileIQ

I'm not sure whether this is made by the same company as Swipefin but it also has the fun swipe left or swipe right feature.  Only this time it is used specifically for tracking your mileage.

MileIQ automatically tracks your miles when you are in the car and even generates reports that is emailed to you on a weekly basis.  Also, like Swipefin, you can easily add notes to each tracked expense as needed.

ItsDeductible

This is an app connected to Intuit's Turbo Tax that helps you keep up with your charitable donations.  It tracks the donations you make and calculates a value for your donations that you can use to write off on your taxes.

ItsDeductible is free to use and all you need to do is set up an account with some basic information.  Then you input the charity name and the type of item or items you donated.  

When it comes to the value of the item, you simply have to choose whether it is high quality or medium quality and the software will determine the fair market value. 

The downside here is that ItsDeductible only integrates with Turbo Tax.  So it's better if you're using Turbo Tax to file your taxes.  Otherwise, you can just use the calculated amounts from the reports when you file.  You should still save photos of the items you donate for proof of condition.

Other Quick Tips for Organizing Your Taxes

• Designate an easy to access place for your tax documents
• Group tax documents by category (may need to use file folders, etc.)
• Start a list of things needed for each IRS form and for your itemized deductions (Can use Excel)
• Keep electronic and paper backups of your receipts 

All in All 

Staying on top of your taxes may seem hard at first but once you get the ball rolling you will see that it isn't so bad after all.  And it all starts with organizing your tax documents and receipts.

Trust me.  The benefits of having put in the work to get everything organized is well worth the time, money, and stress it will save you later.

Here's to a stress-free tax season!