26 February 2012
Organizing Your Tax-Time Records: How to Set Up an Efficient System

So, you’re hard at work on your taxes (or, maybe you’re really on-the-ball and have already filed your return!). But don’t you wish you had organized last year’s records better so they could be easily accessed?

Consider these tips for maintaining your records so you’ll be ready when tax time comes around again next year.

Learn the 4 Ps

Denver-based productivity pro Laura Stack promotes a simple but effective “P system” for keeping only what you need (and keeping it easily accessible):

Purge: Throw away or recycle any duplicate, outdated or other otherwise unnecessary materials. As a general rule, you should keep your tax returns forever. But you can usually toss the supporting documents, such as cancelled checks and old receipts, three years after filing. If you run a small business, hold on to employment tax records for at least four years after the tax becomes due or is paid, whichever is later. If you have any self-employed income, keep the records for at least six years.

Plan: Map out your system. For example, start a checklist of things you’ll want to set aside. In addition to things like bank statements and receipts, you’ll want to gather forms such as:
• W-2s from your employers
• 1099-INT (earned interest)
• 1099-DIV (dividends received)
• 1099-B (transactions involving stocks, bonds, etc.)
• 1099-MISC (self-employment income)
• K-1 (partnership, small business or trust)
• 1099-SSA (Social Security benefits)

Put: Next, file everything in the appropriate place. Start with a plastic file box with rails and add six hanging file folders. Keep last year’s tax records and related receipts in a folder marked “Year 1.” The previous year’s records go in a file marked “Year 2” and so on. When you file the current year’s tax records, toss and shred the contents of the “Year 6″ folder and move each set of records back one folder. Then, put the current year’s taxes in Year 1.

Purchase: Hire out what you can’t do. Bookkeepers, for instance, can be hired to compile a tidy and professional set of files out of your tangle of papers.

Take the Paperless Plunge

Digital records are perfectly acceptable with the IRS. That means important paper documents can be scanned as digital PDF files and stored on a computer. The overarching requirement is simply that taxpayers be able to produce any requested documentation “in a legible, readable format.” Note also that any retention requirements for paper records also apply to digital files.

If you’re leery of making the jump to digital record keeping, consider giving it a trial run with just one thing, perhaps bank statements. Then add others. At the very least, consider scanning receipts — which are prone to fading (but keep the original in case it is requested by the IRS).

Maximize online banking. Depending on your bank or credit card company, you may be able to download records onto your home computer. For example, Nevada State Bank’s Online Banking service lets you download transactions as a .csv file.

Computerize it. Personal finance software like Quicken, MS Money and Mvelopes can help track and categorize tax deductible expenses — and then export them into tax software like TurboTax. (Enrolling in PC Banking through Nevada State Bank allows you to export your financial transactions directly into Microsoft Money or Quicken). The trick is to create a regular time of the week or month to enter the data. Schedule it into your day planner, and stick with it — or you will be no further ahead than you were with your mounds of paper!

Find an app. Tap into technology with smartphone apps like Expensify, which uploads transactions from a bank account into a user-friendly database. Ditto for online services such as Mint.com.

Secure it. Finally, make sure your digital files are backed up and securely stored. “Cloud” providers, such as DropBox, Google and SugarSync, are good choices.


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