It’s that time again. Ouch!
Not only does it weigh on you that you have to file tax returns and see how much of your money goes away forever on April 16th, but there is the added stress of organizing the documents to create the returns well before April 15th , so your accountant still likes working with you.
Dread it no more because it’s a lot easier than you think, even if you’ve just been tossing papers in a pile all year. And, there is the bonus of rewarding your 2019 compilation efforts by setting up a simple filing system for 2020, while the categories are fresh in your mind.
While many people are a step up from the total disorganization of not having all their necessary documents, the shoebox method of throwing all tax paperwork in a box can still make it feel like a daunting task if you have multiple income sources. For example, if you’re self-employed, own rental properties, have a business, or various investments, you’ll have more than just a few W2s and 1099s. There will be receipts for deductible expenses like repairs, supplies, or purchase and sales documentation. We want you to keep as much of your money as possible!
Here’s a quick primer on financial document storage. And remember, the point to storage is easy retrieval, not storage for the sake of storage. That’s clutter.
Here’s how to sort your documents
First: What’s the point you need to prove? This is the primary question for any piece of information, but especially financial. Are you supporting a deduction? Determining how much income you had or where it came from? Documenting medical expenses? If you can’t think of a point the paper proves, then you probably don’t need it, but ask a pro or research to be sure.
No, it’s not necessary to save your household utility receipts once the bill has been paid unless you have a home office deduction or an argument with the utility company. In fact, it’ll just upset you if you ever compare this year’s charges to those of years past.
Second: Separate your receipts into three categories--income, and expenses, and general tax support. Read on for more explanation. Use a brightly colored sticky note at the top of each pile area so you remember what each area is for. This is the one time I think it's ok to pile papers because you're going to clip the papers together by category, fill out your taxes and then store these away from your usual work area.
For 2020, make it super convenient to drop the info into the correct home each time you get it, or you will end up with a ‘to file’ pile that people rarely sort and file. Trust me on this one. It’s boring and redundant. If it takes more than opening a drawer to drop it into a file, you won’t do it. If you feel inspired, add a bit of ease by choosing bright green files and bold labels to drop them into so you can find them quickly later.
Income: Whether they’re paper or electronic, paycheck ‘stubs’ go in one file folder or envelope and the same with each financial company’s statements. I usually divide folders for clients into banks, credit cards, and investments, filed by company name.
Expenses: Again, make it slam dunk simple to store expense receipts in either folders or envelopes. I prefer folders because they’re easier to open than envelopes. Hey, one more step to open an envelope (or a box) is one more step you can skip with a folder.
Business vendor receipts? Some accountants will just store by date, referring to their accounting software’s list of when a transaction occurred to find it in the paper stack or digital file. Personally, I prefer to store them by vendor in case there are multiple receipts to research for a question about the vendor transactions. If you don't have a lot of vendors, you can make it easier than a file for each vendor and can simply have three or four files titled A-F, G-M, N-Z.
I sure hope you are working with a bookkeeper or are regularly putting in data into your accounting program like QuickBooks or Peachtree! If you’re not, let’s talk about getting that in place.
General tax support: Deposit year documents like 1099Int or 1099Div, 1095s (health insurance) or your donation receipts and property settlements. Business owners also need to include statements such as P & L (profit and loss), balance, mileage, and equipment purchases. Jot down notes in this file for questions for your financial consultants about what to save and what you can toss. It’s better to include more than you think you might need and let your tax preparer make the cut.
How long should you keep documents?
Tax returns
Indefinitely, including 1099s and W2s. Generally speaking, you can toss your other documents like paystubs after 7 years, but check with your accounting professional about your situation.
Financial Statements
It’s getting better, but for a while, people thought they could always access all their bank and investment statements online and were upset to find companies closed access after 6 or 12 months. Better to save them as you get them than to find out later you were wrong about how long they’d provide them electronically.
Property documents
Indefinitely. I've had clients that have had to prove where they lived decades ago. For example, one person can’t get the insurance company refund from the state’s unclaimed asset accounts because she can’t prove she lived at an address when she was 18.
Health expenses
Save the receipts if you deduct medical expenses. Most people don’t reach 7.5% of their AGI (Adjusted Gross Income), so if you’re not remotely close don’t bother saving them at the end of the year. In general, though, your medical notes should be in a medical history file because they’re not for tax preparation, they're to document your health.
Financial history
Some clients like to keep a list of their investments and other financial histories. They can check if Gramma gave Bob $300 or $3000 for a holiday in 1998, and how it was invested or spent. Or, they sold stock in 2000 and reinvested the money in a company that has changed names three times since then.
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Make it simple, file consistently, and if you don’t want to do it during the year or at year-end, contact me for help.
I’ll make it easy for you to impress yourself and make your accountant happy by filing on time this year.