A year ago, I convinced several clients to allow me to set-up a super simple, organized three-file filing system for each of them, which I promised would make their annual tax organization as easy as one-two-three.
I promised it would be easier to keep up with the day-to-day paperwork, not to mention a breeze when it came time to collect and consolidate their tax-related papers at the end of the year.
Fast-forward 12 months and many happy clients later. In each case it took no time to sort through and organize each of my clients’ files, collate the pertinent papers and run some totals before having the paperwork scanned and/or copied and sent to their respective accountants.
One client, who still can’t believe it took only three hours to sort through his files and put his papers in order, exclaimed, “I had my doubts, but you’ve proved me wrong; my accountant couldn’t believe it either and called to say he was thrilled to receive a year’s worth of tax papers in one envelope.”
The ultimate test came when I set-up the three-file system for my mom and guess what? It worked!
It should be noted that each of the clients had different needs and circumstances, ranging from some clients who were retired with only one home, a few investments and no outstanding debt to others who were still working with three or more homes, multiple business partnerships and multiple investment properties.
The secret – no matter how complicated or simple you think your taxes are to organize – is to keep it simple, which is entirely possible when you use my three-file filing system, which is described below:
Taxes file: The items you put in this all-encompassing file should include copies of invoices pertaining to tax preparation and legal advice, copies of all real estate tax payments; federal and state tax payments and quarterly 1040 estimate payments, and copies of any HUD statements for real estate transactions made that year.
Other forms, such as 1065 (K-1), 1099’s and W-2 forms should be placed in this file when the year-end papers arrive in the new year. (Note: You may want to consider having K-1’s, 1099’s and 1099 corrected forms sent directly to your accountant’s office.)
Taxes/Medical file: In this file, keep copies of ALL medical, dental, audiologist and ophthalmologist/optometrist visits, as well as a copy of the year-end summary of payments made to Medicare, as well as to your health care (or supplemental health care) provider(s).
Save copies of prescriptions, as well as non-prescription over-the-counter purchases, which, in some cases, may be considered as an allowable deduction (ex: insulin, eye glasses, contact lenses, hearing aids et cetera).
You do not need to save the Explanation of Benefits (EOB) forms from your medical providers or from Medicare, although I do suggest perusing the pages to ensure the information is correct. You should also keep track of your mileage to/from doctor appointments. (Note: even if you don’t itemize medical expenditures on your tax return, I suggest running a total of these expenses just in case your accountant decides to itemize them.)
Donation file: In this file, include receipts and/or confirmation letters for donations with the payment information clearly noted. Be sure to keep copies of checks (in case a confirmation letter is not received), as well as detailed receipts for non-cash donations.
Remember; unless the papers are tax-related (i.e.: have a consequence that directly relates to your taxes) don’t put them in the “Taxes File,” which should be reserved for pertinent (i.e.: tax-related) papers only. Additionally, unless you have a home-based office, you probably don’t need to save bank and credit card statements; paid insurance bills and copies of your utility bills since these can easily be retrieved online, should you ever get audited and need to supply back-up copies.
I like sorting through and reviewing the contents of each of the three files periodically throughout the year to ensure everything is in order, that way, when the time comes to put it all together, there won’t be any hanging chads.
Once you’ve sent everything off to your accountant, put the copies in a clearly marked envelope (year & date) for at least seven years. (Note: your accountant may suggest you hold onto the tax back-up for longer than 7 years.)
Remember to keep separate “permanent” files for important papers, such as your car title(s); home and auto insurance policies (current year only); all HUD statements; invoices for capital improvements made to real property; bills associated with investment properties; stocks, bonds, IRA and mutual fund purchase dates/costs, as well as copies of your Will & Testament, Medical Directive and any essential medical records you may have. Keep these files separate from your annual tax files and store in a safe place.
Note: The following suggestions are solely those of the writer, and not those of the Naples Daily News or any of its employees. For a comprehensive guideline, please speak with a tax professional and visit the Internal Revenue Service at www.IRS.gov.