For many individuals and companies, taxes are something you only worry about in March and April as you rush to file and cross your fingers for a large return. If this sounds familiar, it’s time to look into year-long tax planning.
Tax-planning is the practice of considering how your taxes affect your overall financial situation and goals. By organizing tax-related documents as you acquire them (or by working with a bookkeeping service), you can tax plan all year long and stay on top of your financials.
Keep reading to learn how organizing your tax documents and strategizing your taxes year-round is both easy and highly beneficial for all taxpayers.
4 Potential Benefits of Organizing Your Tax Documents
1. Create a Stress-Free Tax Season: If you keep everything you need organized all year long, you’ll know exactly where it is and what you have when it comes to filing your taxes. No rush. No panic. Just stress-free filing.
2. Ensure Tax Efficiency and Accuracy: Have you ever guessed or estimated a figure when doing your taxes? Not only could this get you in trouble with the IRS if they think you purposefully provided false information, but it could also be costing you money.
3. Increase Deductions and Credits: If you don’t have all the relevant documents and figures at your fingertips when filing your taxes, you might be overlooking deductions and credits.
RELATED ARTICLE: Simple Tax Deductions for Small Businesses and the Self-Employed
4. Augment Financial Goals: By aligning your tax information with your overall financial strategy, you can help augment financial goals like saving for retirement, having enough capital for an additional headcount, or building up a college fund for your children.
Which Tax Documents You Should Organized Year-Round
There are many documents that individuals and businesses accumulate throughout the year that should be organized for easy tax planning.
- Previous tax returns
- Employment tax records
- 1099, K1, W2
- IRS notification letters
Invoices and Receipts
- Travel expenses
- Corporate entertainment and gift expenses
- Charitable donation receipts
Records and Transactions
- Credit card statements
- Assets and business property records
- Cancelled checks
- Bank statements
- Business transactions
Take These 6 Steps for Easy Tax Organization and Year-Round Planning
1. Collect Everything in One Place
You can’t begin to get organized until you know exactly which documents you have and where they are. Collect all the documents mentioned in the previous section in one safe and manageable place — such as your kitchen table or a conference table, as you’ll likely need a lot of space.
2. Categorize Your Tax and Financial Documents
Next, you’ll want to develop categories for the documents based on the types of records you have. If you are a small business owner and want to organize both your personal and business records, you’ll want to create separate categories within those two main sections. You might have dozens of subcategories or choose several main classifications as we did above. The goal is to organize in such a way that you can find what you need when you need it.
3. Go Electronic or Go Old School
The easiest way to stay organized is to create folders on your hard drive or in a tax planning program that match the categories you decided on. Then, all you need to do is scan the documents into your computer or use a mobile app to takes pictures and convert them into PDF format. If you’d rather go old school, separate your documents and store them in physical filing cabinets with clear labels.
4. Maintain and Date Your Tax Documents
Don’t just throw all your documents into a folder or scan it all into your computer and then try to sort it all out at the end of the month — or worse, the end of the year. Categorize and store documents as you acquire them. Keep each category in chronological order by placing new files in the front or including dates in your electronic filing system.
5. Review Your Tax Documents Periodically
Some documents might only need to be reviewed once a year, but others can be put to better use if you periodically review them. Take a look at your personal or business finances and other important documents every month to ensure that you are on track with your tax and financial goals.
6. Keep All Tax Documents
The general rule of thumb for keeping tax documents is “3, 7, forever.” But we typically break down these guidelines even further:
- 3 years for typical tax returns
- 4 years for any employment records
- 6 years if you failed to report more than 25% of your taxable gross income
- 7 years for claiming a loss from worthless securities or bad deductions
- Forever if you did not file or filed fraudulently
S.H. Block Offers Comprehensive Tax Services
Have too many documents and not enough time to sort through them on your own? Don’t worry, S.H. Block Tax Services has bookkeeping and tax planning experts who can help you get organized and create more efficient tax filing.
The content provided here is for informational purposes only and should not be construed as legal advice on any subject.