How to get organized for taxes

Flickr image courtesy of: 401(k) 2012

Flickr image courtesy of: 401(k) 2012

I have a love/hate relationship with tax season.  On the one hand, it is a pain to have to go through the meticulous steps of reporting all types of income*, figure out all the ways I can take legal deductions**, and double and triple-check my math.  Not to mention seeing how much of my salary I didn't get to keep.  Products like TurboTax make this easier, but every year there is some weird life circumstance that even TurboTax will make a mistake on and I have to do some digging to figure out what to do.

On the other hand, I can appreciate the end product - a solid accounting of income for the previous year and looking forward to the next year to make sure I maximize my household's take-home pay without paying penalties for underpayment of taxes.

A few year ago, after being very frustrated around tax time because I was missing documents and was pressed for time to get them done, I finally said "I've had it" and vowed to get organized.  I use a very low-tech organization system, but I know that there are more high-tech ways to get organized so I've laid out both for you to consider for 2014. 

Low-tech tax document organizing

Materials: Folders, file cabinet, hanging file folders

  1. At the beginning of the year (not in April when taxes are due!), I create a folder for each income source.  In our case, that means one folder for personal income (W-2 type) and one for rental income.  I label the folder with the income source and the tax year.  I don't get more structured than that, because that tends to impede the immediacy of filing away documents.
  2. I place all folders for the current year into a hanging file folder for the tax year and that lives in the front of my file cabinet.  My file cabinet is easily accessible, which is why I put them there.  You should put your folder in an easily accessible place.
  3. ANYTHING that might be tax-related is placed in the respective folder.  When we received monthly statements from our property management company via mail, every one of those was placed in the rental income folder  Any charitable donations we make, we get a receipt for and place those in our personal income folder.  In January when we start getting tax-related documents in the mail from employers and financial institutions, all of those go in their respective folders.  
  4. When I have received everything I need to do my taxes, I just pull out my hanging file folder and get to work.

High-tech tax document organizing

Materials: Computer, document scanner, digital camera (optional), encryption software (optional)

  1. At the beginning of the year, create a set of folders in your computer following the same strategy as the paper folders.  Given the sensitive nature of the information on tax-related documents (SSN#!), you may want to use encryption software to encrypt the folders or files you place on your computer.  This TechRepublic article from May 2013 lists five apps that you should consider for this purpose.
  2. For electronic documents and receipts, just add those to their respective folders on your computer.  Be sure to give them a clear name and include the tax year that they belong to.
  3. For paper documents, you will need to scan and save them to your computer.  You might be able to get away with the quick method of taking digital photos for smaller items like receipts, but others should be scanned in as PDF files.
  4. Just open the files as needed when you are ready to do your taxes.

Keep in mind that using a system you will actually use is the most important step to getting organized.  If what I do doesn't quite work for you, change it!

*Yes, you need to report all income.  Underreporting income is a crime and you can pay serious penalties or even go to jail for not reporting all income.

**Yes, you should take all legal deductions.  There is no reason to pay more to the government given their track record of poor financial stewardship.