There are many reasons why it is important to organize your tax documents. Perhaps the most important reason is that if you are ever audited by the IRS, you will be glad you are organized. An audit can be a very stressful experience, and if you are not organized, it can be even worse.
Another reason to organize your tax documents is so that you can easily find what you need when you are preparing your tax return. If you are not organized, you may end up spending a lot of time looking for documents that you need. This can delay the filing of your return and may even cause you to miss the filing deadline.
Organizing your tax folders can also help you to find potential tax deductions and tax credits that you may be eligible for. If you are not organized, you may not find out about these deductions and credits until it is too late.
Finally, organizing your tax documents can help you to stay organized year-round. This can make tax season a lot less stressful and can help you to stay on top of your finances throughout the year.
There is no one definitive way to organize your crucial tax documents, but there are some methods that will make the process easier come tax time.
Types of Tax Documents
Ideally, you want to hang on to all your tax documents for at least seven years. This includes W-2s, 1099s, 1098s, and any other tax-related forms. If you’ve made any major life changes in that time (moved, got married, had kids, etc.), you’ll also want to keep any corresponding documentation.
You may also need to hold onto some documents for a longer period of time. For example, if you sold a home, you’ll need to keep your closing papers for at least six years. If you received a large tax refund, you’ll want to keep your records until the statute of limitations runs out (typically three years).
In general, here are a few types of documents you should keep in your tax file:
- Wage and Income Documents: This includes W-2s, 1099s, and 1098s.
- Proof of Tax Payments: This can include cancelled checks, receipts, or other documentation.
- Proof of Tax Deductions: This includes receipts, invoices, or other documentation.
- Proof of Tax Credits: This includes receipts, invoices, or other documentation.
- Documentation of Home or Other Property Sales: This includes the closing statement, deed, and settlement statement.
- Documentation of any Gains or Losses from the Sale of Property: This includes Form 1099-B, Form 8949, and Schedule D.
- Documentation of IRA Contributions and Distributions: This includes Form 5498 and 1099-R.
- Documentation of Education Expenses: This includes Form 1098-T.
- Documentation of Child Care Expenses: This includes Form 1098-C.
- Documentation of Other Miscellaneous Expenses: This includes any other documentation that supports deductions on your tax return.
Organizing Documents by Type
Many people find it helpful to organize their tax documents by type. For example, you might have one pile of receipts, one pile of bank statements, and one pile of W2s. This method is convenient because it allows you to see at a glance how much income you earned, how much you spent, and how much you can claim as a deduction.
Organizing Documents by Date
Another way to organize your tax documents is by chronological order. This method is best if you want to see how your finances have changed from year to year. You can order your documents from oldest to newest, or from newest to oldest. This can be helpful in determining how much money you’ve made or how much you’ve spent over the years.
No matter how you choose to organize your tax documents, be sure to keep them in a safe place. A fireproof safe or a safe deposit box at your bank are both good options. And be sure to keep a copy of your documents at home, just in case you lose the originals.