If you haven’t been keeping up with your financial record bookkeeping, tax time can quickly become a nightmare!
While it can be a daunting process to keep track of all your financial documents and receipts, you can avoid headaches at tax time by keeping good records during the year, regardless of whether you are an individual taxpayer or a small business owner.
Keeping well-organized records can assist you with maximizing your tax breaks as well as help you answer any questions on the off-chance that you are audited.
Take a look at the following tips which will help you simplify tax filing for years to come.
The first step to simplifying your tax filing is to figure out which receipts you actually need to keep and for how long and which ones are okay to toss.
Tax-related documents that help you identify sources of income, keep track of expenses, and determine the value of property are just some of the documents that you’ll want to make sure to keep. However, some receipts may not be so obvious. For example, you may need to keep your gas receipt if you’re looking to deduct a travel expense for work or a pharmacy receipt as proof of a medical expense.
Use common sense to help you decide which receipts should be kept and which can be tossed.
At a minimum, you should keep all receipts and documents related to any tax deductions for three years, however in some cases you may need to have documents from up to six years ago. Additionally, documents that pertain to physical assets, such as a home, automobile or office equipment should be kept for seven or more years.
It’s also important to recognize which receipts are okay to throw out. You most likely won’t need receipts for your latest grocery or apparel shopping.
2. Ditch the Box
It seems that for ages the classic approach has been to shove all receipts and documents into a shoebox. While it may seem like a great way to ensure that all your paperwork is in one place, let’s be honest, you probably have no idea what documents are actually in there, and you may not even know where it is!
Filing receipts in a shoebox as your main storage container is highly inefficient and can make filing your taxes even more stressful.
Instead, you’re better off creating a filing system where you store all receipts and documents by year and separate them by type of income or expense. You can then keep all records related to a particular item in a designated folder or envelope.
Another option is to store all your receipts digitally. You can either use a home scanner or get an app, like CamScanner, to scan all your receipts. You can then create a folder on your computer for the year and the create sub-folders, labeling each by the type of expense.
If you do decide to digitize the process, it’s important to backup your files (ideally to a remote location like the cloud) on a routine basis just in case anything ever happens to your computer.
3. Credit Card
The great thing about credit cards is that most of them will provide you with quarterly and/or annual reports that categorize your spending. By having at least two credit cards, one for personal expenses and one for business expenses, you’ll be able to make your tax preparation much more simple.
Use your business credit card for all business related purchases and you’ll reduce the amount of receipts that you need to store as everything you need will be on a printout provided by your credit card company.
Depending on the credit card, you may even have the ability to generate customized reports so that you can create a list of payments related to a specific vendor or payments that you’ve made during a specific time period.
The best part about using a credit card is that many will give you points or cash back for all of your purchases, something that you don’t get when you pay with cash or check.
If you aren’t using an accounting solution, then it may be time to consider one as it help you with efficiency and accuracy when it comes to filing your taxes. A good bookkeeping solution can really simplify the process of filing your taxes.
One solution that you may want to look into is Evernote which can allow you to manage all your receipts and documents necessary for filing your taxes.
Evernote allows you to easily store and organize images. You can either use their ScanSnap scanner solution or your own to seamlessly digitize paper statements, receipts, investment forms, medical expenses, W-2s, pay stubs, and tax documentation and then place them directly into Evernote. You can then tag each expense to make it easy to find later on.
If you’re an investor then you may also want to look into automating your ability to use tax loss harvesting, which is a popular tax planning strategy, that allows you to offset any capital gains. You can look at robo-advisors such as Betterment or Wealthfront to help with automating the tax loss harvesting process.
Keep in mind that the sooner you follow the steps outlined above, the easier it’ll be when it comes time to filing your taxes. Not only that, but with better recordkeeping, you’ll have better chances for maximizing tax breaks as well as be better prepared if your return is selected for examination or prepare a response if you’re billed for additional tax.
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