♦Doing your taxes is easier when everything you need to input
onto the forms is within arms reach. And organizing your tax information is easy
when you have a routine system. Keep everything handy year-round using three
items:
1.) a folder or letter-size
plastic envelope
2.) a
three-ring binder
(loose-leaf notebook found in the office supply or school supply section of most stores)
3) multiple binder pockets
(like three-hole punched
slash file pockets).
♦As you complete paying and mailing your bills monthly put the corresponding
statements and receipts into the plastic envelope. Only put things
relevant to your taxes in this envelope such as tax deductible long-distance phone bills or
medical payment receipts. This is NOT a catch-all envelope for warranties,
appointment slips, etc. Also toss other relevant items into the envelope as you get them such as
records of investments, income such as in the form of check stubs or check
copies, etc.
♦Then once quarterly transfer everything from the
catch-all plastic envelope into the three-ring binder. Place and categorize these items into the "slash pockets".
I like to use multi-color, plastic slash pockets but you can use just one color
or clear slash pockets if you'd prefer. And while I like "plastic" slash files,
stores also sell slash files made of "paper".
♦Each slash
pocket folder can hold a single category such as all phone bills or all pay
stubs in one pocket.
♦Tape small
flyaway items, such as store receipts that are tax deductions for you, onto 8
1/2" x 11" paper before filing. If you do this, be sure to tape receipts
to the front and back of the paper ongoing. This saves space in your pocket file
folder and in your binder in general.
♦Also, I have found that sometimes the ink on some (not all)
store receipts fades by year-end and especially if your tape touches it; so if
the writing is light on your receipt, you may want to trace over it with a pen
or write the dollar total with your pen somewhere else on the receipt.
♦If you'd like, put adhesive file folder labels that
contain vendor or category names, such as "cellular telephone bill", on the
front, bottom right of each slash
pocket. You can buy these labels for a couple dollars per pack in any office
supply store and hand-write on them (or you can get fancier and more expensive
with file folder labels that go through your printer). This way even when you
have yet to put anything in the pocket file, you'll know at a glance something
does go in it and what that is.
♦One additional step I do that may interest you too is keep a
spreadsheet on Microsoft Excel that contains all of the items that I put into
the binder (which is anything that will be used when preparing your annual
taxes). I happen to use Microsoft Excel version 2002 but newer versions
are available.
♦As you transfer items quarterly from the catch-all,
letter-size plastic folder to the individual categorized slash pocket files in
the binder, type information about each item onto your spreadsheet. Put
the information under columns with headings like "date of income or
purchase,"
"description of income or purchase," and "vendor." These
three column headers then work
for expenses and income. These would be columns A, B and C on your spreadsheet.
♦Then have separate columns from column D onward on the
spreadsheet with each category name such as "web hosting", "long-distance
telephone", "office supplies", and "revenue". In these columns, you put the
dollar amount of the item described in columns A, B and C (whether it's income
or an expense). Each income or expense/tax deduction category has its own
column so you can see at a glance how much you've spent, for instance, on
long distance telephone calls or web hosting.
A lot of my spreadsheet categories are related to my home
business; yours may be different. You may not even have a home business. Even if
you don't operate a home business, you can still use the entire method described
on this page to track your general household expenses and income from your job(s).
♦Also, include rows on your spreadsheet with quarterly
totals for expenses and quarterly totals for revenue or gross income (this is
helpful if you pay estimated quarterly taxes).
♦Make a row also
for annual total for expenses and annual total for revenue. Excel formulas can
help you add the figures in your columns and rows automatically too so you don't
have to keep adding new figures by hand.
♦If you operate a business, a final cell on the
spreadsheet can be your net income. Just set up an Excel formula to calculate
it by having the formula subtract your total expenses from your gross income.
And even if you don't operate a business, you can use this row to see how much
of your income remained after household expenses or other tax deductible
expenses.
♦When it's tax preparation time, you simply have to transfer
your figures from the spreadsheet to your tax forms or give a copy of the
spreadsheet to your accountant.
♦Refer to the hard copies of the receipts, statements and
stubs in your binder slash pocket folders if anything looks questionable (such
as perhaps you think you made an error with the figure on your spreadsheet).
Then annually remove the items from your binder, staple or clip the items in the
individual categories together, and file all of them in a hanging folder in your file cabinet along with your completed tax form copies. These are your
hard copy records. You'll need them if the IRS ever audits you.
♦Once you create this system for your financial records,
you're set for future years. Just re-use the binder and pocket folders
year-after-year and copy your spreadsheet model to a new electronic file each
year. Make changes as necessary when you have new types of expenses or income.
♦Also, don't
forget to make back-up copies of your financial spreadsheets ongoing using a
diskette or CD. Even if you print copies of the spreadsheets ongoing, this will
save you from having to re-create the electronic files if your computer crashes.
Keep the print copies of your spreadsheet and the diskette or CD copy in a slash
file pocket folder as the first item in your binder.
♦You'll find
this system saves you time ultimately by keeping you organized year-round. You
know at a glance your financial status. And at tax time, it takes you less than
an hour to prepare your taxes or the tax information to give to your accountant.
And it takes your accountant less time to process your taxes (which means a
savings for you if you pay your tax accountant by the hour).
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