It’s never too late or too early to get your tax-related documents organized. This system isn’t about looking pretty, it’s about doing it right.
The first year my blog earnings passed the hobby level and turned into an actual full-time job, I had no idea how to organize tax documents. It took me over a week to fill out my return, and I swore I’d figure out how to make doing my taxes easier. Now, almost a decade later, my business has expanded, and my returns are more complicated than ever. But it only takes part of an afternoon to prepare my taxes, thanks to the document organization system that I set up.
The Best Way to Organize Papers and Receipts
Whether you’re self-employed, run a small business, or work for someone else, there are many ways to organize your papers and receipts. But the best method is one that you’ll actually stick with, and that means finding one that’s easy for you to use no matter how busy you get.
For me, that doesn’t always mean the prettiest system or even a lot of fancy materials. So, my home office setup uses plain, old-fashioned manila envelopes. You’re free to choose pretty ones if that’s what will motivate you to stay on top of filing papers. From there, organizing your tax documents is an easy 3-step process.
How To Organize Tax Documents
What You’ll Need:
- Your big, scary pile of documents.
- 10-12 manila envelopes (9×12″ size)
- A permanent marker
Step 1: Get Ready
It’s best to work in a spot that lets you spread out. A table might do if you don’t have a complicated return. The more types of deductions you usually take, the larger your space needs to be. I found that working on the floor of my home office was easiest since it kept me from having to lean over a table for hours. Once you’ve chosen your spot, gather all of your tax-related documents and receipts in a pile.
Step 2: Sort This Way
The U.S. tax forms classify types of deductions. Filling out tax papers is a lot easier if you sort your papers based on those. So, grab the marker and write the category names on separate manila envelopes. (See below.)
Then spread out the envelopes so you can see all of them and start sorting receipts and papers by type. This is easiest if you label the envelopes toward the top and lay papers beneath that, rather than inserting them one at a time. Once you’ve gone through the entire stack, straighten each category’s papers, add up the total amounts for your deduction, and write this on the front of the envelope under the label. Then tuck the papers into the envelope.
Labels to Use
- Income: Pay stubs, W-2s, 1099s, interest statements, dividend statements. Also, include jury duty pay.
- Medical expenses: Receipts from doctors, dentists, hospitals, labs, pharmacies, vision centers, etc. Also, receipts for any payments made to purchase health, dental, and vision insurance.
- Charitable donations: Include receipts for cash donations, as well as donated items (clothes, toys, cars, etc.).
- Real estate papers: Year-end mortgage interest statements, real estate tax documents, home owner’s insurance receipts, and other paperwork associated with casualty losses to your home. If you made home improvements, include their receipts here. They may/may not be tax-deductible (talk to your financial advisor), but at least you’ll know where they are.
- Property and sales tax papers: Receipts for paying taxes on cars and other vehicles subject to personal property tax. Also, sales receipts for big-ticket items.
- Child care payments: In addition to receipts for payments to daycare or sitters, be sure you have paperwork with your babysitter’s contact information and Social Security number if you paid him/her to watch your child while you worked or looked for work.
- Student loan payments: Any papers related to payments made and interest charged.
- Work-related expenses: Receipts for work-related costs not reimbursed by your employer (e.g., work-related educational expenses, receipts for union dues, professional license renewal fees, tools or supplies required for your job, etc.)
- Self-employment expense receipts: (You may want separate envelopes for each.) Receipts for advertising, office supplies, office cleaning, office repairs, employee pay, payments to contractors, business-related meals and entertainment, professional licensing fees, business travel, equipment purchase or rental, and contributions to SEP-IRAs, SIMPLE IRAs, and solo 401(k)s.
- Utility bills for home-office deduction: If you qualify for a home-office deduction, you’ll need your home’s utility bills to calculate the amount deductible from your taxes.
3. Do Your Taxes and Store Them
As you fill out your taxes, refer to the amount you jotted down on the front of the envelope. It’s not a bad idea to double-check your calculation when you review your taxes right before submitting them, too. After you’ve filed your taxes with the IRS, make a copy of your signed return and proof of payment. Put these with the manila envelopes containing your related documents and receipts. Label the container with the tax year and put it in a safe place. (I use these accordion file wallets* which, again, aren’t pretty, but they work well.)
According to the IRS, you should keep tax documents for 3 years from the date you filed your original return or 2 years from the date you paid the tax, whichever is later. If you deducted bad debts or worthless securities, you should keep your returns and supporting documents for 7 years. If you need to amend your return or get audited, you know exactly where to find your supporting tax papers and receipts. And, when the appropriate amount of time has passed, you can easily grab the entire container and start shredding.
How to Keep Tax-Related Receipts Organized
To get a jump-start on organizing your tax paperwork, label a set of file folders with the same categories you used this year. Then, label an empty manila envelope with the words TAX-RELATED and tape it inside a cupboard door in your kitchen or wherever you sit to pay bills. This will hold your receipts until you’re ready to file them.
Once a month, file the receipts that you’ve been collecting in the holding envelope. When you’re ready to do your taxes, you’ll have everything sorted already, so you’ll be able to fill out the tax forms quickly and confidently, knowing you didn’t overlook any deduction you’re entitled to take.