In this week’s challenge you’ll take the steps to create a personal tax organizer system, and to organize receipts, to make tax time as simple as possible.
Are you new here? The Create A Personal Tax Organizer System And Organize Receipts Challenge is part of the 52 Week Home Organization Challenge. (Click the link to learn how to join us for free for future and past challenges if you aren’t already a regular reader).
This week’s tasks will not be too hard for most people, since if your taxes are easy to do, your organization system for receipts and tax documents can be simple too.
On the other hand, the more complicated your tax situations is, the more onerous your organizing requirements may become.
This challenge is geared towards creating a personal tax organizer system that leans towards simplicity, since that is realistically all that many of us need.
However, if you do a lot of itemization of deductions, or have a small business or partnership for example, always consult a tax professional to find out what types of items to file and keep for reference for your taxes.
Step 1: Understand The Broad Categories Of Receipts So You Can Organize Them Easily
The first step in the Create a Personal Tax Organizer System and Receipt Organization Challenge is to conceptually understand the various categories of receipts, so you can deal with them accordingly.
Here are the broad categories of receipts that you should consider, and categorize each separate receipt into when dealing with your paperwork on a weekly basis.
- Receipts for minor purchases, most of which you’ll need to reference in a couple of months, at the max, or never again
- Receipts for major purchases, which you should keep as part of your personal home inventory to help you with insurance claims, warranties, etc. if needed in the future
- Receipts for real property or cars, such as your home or other large assets, which eventually may be needed for tax purposes to show gain or loss, or depreciation, for example, but not in the current year
- Receipts that will back up deductions or other entries on your tax return for this current year
Step 2: Make A Habit Of Dealing With Your Receipts And Any Tax Documents Weekly
The key to success with the Personal Tax Organizer And Receipt Challenge is to get in the habit of dealing with and filing your tax documents and receipts on a regular basis, so they don’t pile up, and you forget what a certain receipt or piece of paper signifies, or lose it in a pile of stuff.
In last week’s challenge, about organizing bills, I asked you to set aside a set period of time on a weekly basis to pay bills, and deal with other financial matters. One of those financial matters you should deal with during this weekly paperwork meeting with yourself is any receipts and tax documents that you have received or accumulated over the week.
If you haven’t set up this weekly schedule yet, check out the previous challenge for more details on what this entails.
In the steps below I’ll share with you the types of tasks you should do, during this paperwork session, related to receipt organization (which will take you about 5-10 minutes maximum, if you have just a normal amount of receipts to deal with).
During this time you’ll look at each receipt or other tax document, figure out which of the four categories it belongs in, and then file it accordingly.
Step 3: Create Your Filing System For Minor Receipts
The third step in the Create a Personal Tax Organizer and Organize Receipts Challenge is to deal with the most common category of receipts, the minor little ones that you probably don’t need to look at again, or at least not for very long.
Examples of minor receipts are receipts for groceries, gas used for personal (non-business) cars, small clothing purchases, entertainment expenses, etc.
As you gather these receipts during the week place them in a designated envelope in your purse, or in your billfold, so you can keep them all in one place. Then, during your weekly paperwork session pull them out and review them to the extent necessary to check and see if your credit card bill was charged properly, or your check cleared, or fill out these purchases in your budget spreadsheet.
Then, just clip them all together, label them for the week as “miscellaneous receipts for week of ______” and throw them in your monthly bill folders I suggested using in last week’s challenge.
If you want to keep your receipts separate from your bill stubs (which I don’t think is necessary), you can use a smaller expandable folder which is the right size for receipts and cancelled checks.
I like this system, because it takes very little time to deal with the majority of your receipts this way, but you can still find a receipt you need, if you have to.
An example is that if you realize you need to return the pot you bought at Walmart that you bought two weeks ago you can go back to the right month’s file folder, find the pile of recipts for that week, look thorugh until you find the Walmart receipt, and grab it.
It may take a little longer with this system to find the receipt than if you had all your Walmart receipts date organized, but honestly, who needs to do this? You’ll save more time in the long run throwing them all in these monthly files, since the majority of the time you’ll never need to look at these receipts again.
Further, you’ll just get rid of these receipts at the same time you get rid of your old paid bills stubs during your annual purge (see the Organize Bills Challenge for more details).
Step 4: Create A System For Filing Major Receipts Necessary To Complete Your Personal Home Inventory
This step in the Create a Personal Tax Organizer System Challenge is actually covered more in a separate week of this challenge, so I’ll just reference it here now.
Basically, the idea is that you want to have proof of your large purchases, such as large appliances and electronics, etc. if a disaster occurs and you need to file a claim with your home or renters insurance company. Pictures and inventories of what you own help the insurance company, as well as seeing receipts of how much the items cost, when new (or new to you).
Read the instructions from that challenge for more ideas on how to organize receipts such as these. Further, we’ll touch again on many of these documents when we organize and store our home warranties in week #15 of the challenge.
Should You Consider A Receipt Scanner?
You may want to consider scanning your receipts and documents and storing them electronically, at least for categories 2-4 of the receipts. This can be especially helpful for cheap items, printed from a receipt roll on a cash register, which seems to have the ink fade after a couple of months.
If you are going to store receipts electronically, make sure you only save the ones worth saving though, so you don’t waste your valuable time scanning receipts you’ll never reference again. That’s why I don’t recommend scanning receipts that fall into the first category of minor receipts, for example.
Further, you need to have an adequate back up system for all electronic files if you decide to scan receipts to make sure you don’t lose anything if your computer’s hard drive crashes, for example.
Many people have scanners these days, and these will work for digitizing a few receipts here and there. However, recently companies have also created receipt scanners which easily scan documents of many sizes and store the material electronically, which are designed to have additional organizing benefits over regular scanners.
One of the leading brands is called NeatReceipts, and they have both mobile and desktop versions of these scanners which also have built in software which automatically extracts key information in the receipt that can then be exported into financial and tax software, such as Excel spreadsheets, Quicken, Quickbooks, Turbo Tax, etc.
I have to admit these receipt scanners look pretty cool, but they may be a bit of overkill for the average home. However, if you’ve got lots of receipts for work or a home business it may be worth considering one. Further, it appears the idea may still, at this time, be more advanced than the technology so read all the Amazon reviews and make a decision for yourself before purchasing one.
Step 5: Home Filing System For Tax Documents That May Be Used In Later Years, But Not Now
In step 5 of the Challenge, we’re figuring out how to organize one of two major categories of tax documents. This category of tax documents are really things we’ll deal with more next week, when we put the finishing touches on our home filing system, and keep track of home expenses, insurance documents, investments, etc., so don’t worry about it this week too much.
Just so you get an idea of what items this category includes, it includes, but is not limited to, records of retirement and non-retirement based investments, expenses incurred on your home, such as a new roof or furnace, etc.
These are documents you most likely would save anyway at least for the entire time you own that particular piece of property, but you may also reference them at tax time in a future year, such as if you sell or otherwise dispose of that property in a year.
A good rule of thumb for these types of documents is to keep them the entire time you own that piece of property, and then for six tax years thereafter if you had to reference it in your taxes the year you disposed of it.
Step 6: Create A Personal Tax Organizer System For Storing Your Tax Documents You’ll Reference In This Year’s Tax Returns
Finally, step 6 is where we get to the meat of the the Create a Personal Tax Organizer System Challenge, because it is where you actually organize your tax documents and receipts that you’ll reference this year, when you do your taxes.
The IRS gives very little guidance about how to organize your paperwork, merely saying:
You should keep your records in an orderly fashion and in a safe place. Keep them by year and type of income or expense. One method is to keep all records related to a particular item in a designated envelope.
IRS Publication 552: Recordkeeping For Individuals
As you pay bills, or otherwise get documents throughout the year that you will need to reference again when preparing your year’s tax returns it is important to put everything into a personal tax organizer system so everything is organized and ready to reference when you sit down to do your taxes (or give to your tax preparer).
I will caution that the more complicated your taxes, and the more documentation needed to support them, the more elaborate your personal tax organizer system needs to be. On the other hand, if doing your taxes is a fairly simple matter, go with a simplistic system to fit your needs. No need to complicate something that doesn’t need to be!
Tips For Creating Your Own Personal Tax Organizer System
Create a filing system for a specific year using an expandable folder labeled with some categories unique to your situation, to properly categorize your tax documents. You don’t want to pull your hair out later when trying to work on your taxes having used the shoebox system to throw everything in together.
You should label the outside of the file with the year of the documents it contains, and later, once you actually file your returns, you’ll also keep a copy of your filed taxes for this year in the folder too. That way all the returns and all back up documentation stay together for easy access and reference later, if needed.
Example categories you may wish to include in your personal tax organizer system include the following (add or subtract to this list as needed, based on your some or unique circumstances):
- Income (including documents received from third parties, such as form W2s and form 1099s)
- Child care costs
- Business or professional deductions
- Tax correspondence (with IRS or state officials)
- Student loan payments
- Misc. receipts for other deductions
- Payments of tax made throughout year (such as for quarterly estimated taxes, etc.)
- Slot for your copy of your filed tax return, once it is completed
Once you’ve created this system, as you go through your receipts each week, or pay a bill that needs to be saved as documentation for your taxes later, merely slip it into the correct file of your personal tax organizer during your weekly paperwork session. You’ll thank yourself later for making it easy to reference all the right materials as you fill out all the necessary forms.
Step 7: Create A System To Purge Documents Periodically Without Causing Yourself Liability Worries
A frequent question is how long to keep tax records, and the personal tax organizer system you’ll create for every year? The short answer is “it depends.”
Frankly, the IRS doesn’t make it very easy for you to have a simple answer to this question, since there are always exceptions to the rule.
I tend to be conservative because I don’t want to get rid of paperwork if it may come back to haunt me, if for example, you have an audit or other encounter with the IRS. In my opinion, this trumps a little filing space since with my personal tax organizer system above all your tax documents will be held in one expandable folder or small filing system anyway, and it doesn’t take up too much room.
Many tax professionals suggest to hold onto your filed old returns forever (you can digitize them if you don’t want to keep track of the paper anymore), and to keep all supporting documents for at least six full tax years after you filed, since that is the longer limitations period for the IRS, typically.
There is even an exception to that rule though. If you never filed a return, or filed a fraudulent return, you should hold onto all documentation indefinitely, since there is no limitation period in those situations.
Thank you for joining me for week 12 of our 52 week home organization challenge! I hope that you’ve enjoyed it and I cannot wait to see you next week!