Getting Ready for Tax Time
I'm thrilled to be bringing in guest bloggers to the Little Red Stool Organizing website. If there is anything specific you would like to hear about from an expert, let me know and we'll see who we can bring over. Today I'm proud to have Amy Horne walk us through some helpful tips on making tax time easier for all of us.
Tax Time. Those two little words can strike fear into so many of us. The task of gathering your information seems so daunting. If you are like me, sometimes you spend more time worrying about the task than the time it would take to actually do it, and once you’ve completed the task you realize what a waste of energy and time it was to stress over it. My goal is to help you with some suggestions of how to organize your tax information so that when the next filing season rolls around you will not be anxious about getting started.
Keeping Up with Tax Documents
Some may believe that gathering and organizing your tax information is a once-a-year task. I would argue that it is an “all year” task. If done right, keeping your information organized as you go will make all the difference in the world when it is time to summarize and then prepare your tax return, or deliver your information to a tax preparer. The simple act of keeping everything in one place where it can be easily found is the first place to start.
The task of staying organized does not have to be anything high-tech, although you could certainly create a file folder on your computer to scan information for storage. For me the easiest thing to do is to have one specific file in my file drawer labeled “Tax Information.” Throughout the year as I get paperwork that is related to taxes I simply file them in that file folder. When I believe I have received everything needed to file my taxes I organize the information in that one folder so it’s ready to enter my return. Taking this one step further, you could make a list of all the items you usually need to prepare your tax return and leave that in the front of the folder. I like to make lists so that I don’t forget anything, and this could certainly be a helpful way to make sure you have all of the information (consider checking off items as you receive them). My other thought to the usefulness of this list would be in helping to make things easier for my spouse in the event something was to happen to me.
If you are a sole proprietor (self-employed), it is suggested to summarize your income and expenses at least on a monthly basis to keep things more manageable. Going through an entire calendar year of transactions and information to summarize it could definitely be challenging and time consuming. However, if you summarize each month as you go then you always know where your business stands and you can be prepared to make quarterly estimated tax payments if necessary. Using computer software to organize and reconcile your income and expenses can be beneficial, but is not necessary.
If you use a tax preparer you should make sure your income, expenses, and deductions are summarized with totals by category, legible, and organized. Provide all documents received to substantiate your income, expenses and deductions for the year. Some of the typical documents you should gather for your tax preparation are as follows:
W-2s
1099s
1099-NEC for self-employment income
1099-MISC for rental or other income
1099-INT for interest income
1099-DIV for dividend income
1099-R for distributions from retirement plans
Medical Expenses (if you have a large amount of medical expenses and are not claiming the standard deduction)
Property tax on a residence or 2nd home
1098 – Mortgage Interest statement
Ad Valorem tax on an older vehicle’s tag renewal, or Title Ad Valorem Tax paid on the purchase of a vehicle
Charitable Contributions
Using a tax “organizer” is a good way to summarize the above information if you have more than just a few of the items from the list. Here is an example of a generic tax organizer. A tax preparer would much prefer a tax organizer along with the pertinent documents rather than a grocery bag or shoebox full of receipts that you have not summarized. By taking a little bit of time and listing your receipts (by category so you can provide category totals) you can help keep your tax preparation fee as low as possible (if you are using a tax preparer).
How Long to Keep Tax Documents
The Internal Revenue Service suggests, in most cases, keeping the documents that you used to prepare your taxes for three years after the date you filed your original return. Some states have initial statutes of limitations for more than three years so check your specific state to see their record retention suggestions. For most people the three years mentioned above will apply, however, there are always special cases to consider. If you under report your income by 25% or more, the statute of limitations on your return is extended to six years. If you have written off bad debt or a worthless stock security, you would want to retain those records for seven years. In the case of fraud, the Internal Revenue Service has an unlimited statute of limitations. You would also want to keep notes in your files to support any years where you will not be filing a tax return. For instance, if you decide to take some time off from working and are not employed (or an example that may hit closer to home – if you took some time off to take care of a sick relative and you did not earn enough during the year to require you to file), you would want to note that in case the Internal Revenue Service questions a gap in your tax filing.
Properly organizing your tax information doesn’t need to make you anxious any longer. Decide now that you will make 2021 the year that you get organized with your taxes – take baby steps if you need to, but there’s no need to spend all year dreading the task that will be easy to accomplish if you plan for it properly.
Amy Horne received a Bachelor’s Degree in Business Administration from Augusta State University in 1997. She joined the Anderson, Adkins & Company team in 1998 and currently serves as one of the firm’s managers. She provides tax and accounting services to the firm’s individual, corporate, and nonprofit clients. She is a member of the American Institute of Certified Public Accountants and the Georgia Society of Certified Public Accountants. When not at work, Amy enjoys spending time with her family, working out, and running.