- Personal Finance»
- Tax & Taxes»
- Tax Advice
Saving the Tax Man Headache
There are many who will say that taxes are a pain in the (insert favorite synonym for the gluteus maximus). They are only a pain if you are not prepared for them. In this article, several factors as to how to save you a headache and late nights doing taxes will be covered. Personally, I am in favor of a straight flat tax on all goods instead of an income tax but that's me and best left for another article. The first step in preparing for taxes does not start in January after the year you are trying to file for but in the January of the current tax year. Example is to start preparation for the 2009 tax filing; you need to start in January 2009 preparing for it. You might ask why I need to prepare so much in advance and it is simple, if you are organized at the beginning and stay organized, you will have a relatively painless tax year next spring. Since it is too late to worry and reduce the stress for filing your 2008 return, we're going to focus on the 2009 tax return preparation.
Do you own a business? If you said no, think about where all your money comes from. Do you receive any outside of a regular job? If you answered yes then you might have a business. There is no need to have an issue if you do own one but it means you have to be that much more prepared come January next year.
The key to income tax is to be as organized and meticulous as possible. I personally prefer to keep everything in an accordion style file folder. I further break everything down by what it is and what I used it for in my life. Receipts from purchases around town are kept in their own slot to save time. This is also helpful if you have an item break and it is under warranty because you will be asked for the receipt. The Mortgage paperwork and the statements from the year are all kept together in another slot along with the real estate tax information and even the home owner’s insurance paperwork. You might ask why this is together, that’s an easy answer. You will need to know your mortgage interest in order to claim it on your taxes. If your mortgage company is anything like mine, there is a potential for errors in the tax form you receive from them. I cross check my statements to ensure the amounts are correct throughout the year and then compare it to the tax paperwork for a match. This has saved me over $3,000.00 due to a typo on my tax form that was caught because I’m organized. You get the idea on putting all paperwork into a file for you use.
Business Owners or Hobbyist who make money on the side of a normal job
Now, let’s cover what you should keep and what you can throw away. I would always recommend keep everything but that is not always possible. The big things to keep are: receipts where you buy electronics, video game consoles, computers, appliances, and home improvement items. These come in handy for several reasons. I tell you to save the receipts from electronics because there are warranties you need the receipts for and if you are already being organized then you might as well incorporate this into your new lifestyle. If you make money on anything that is not reported on a W-2 by your employer, you will need to save receipts relating to that as well. It can be for office supplies, office furniture, computer related items, and even supplies to make items if you sell finished goods. A good example is that if you make hair bows for boutiques, you would need to save the receipts for the hair clips, ribbons, accessories, glue gun, glue, wood engraver (or whatever you use to seal the ribbon), and hair spray/starch (if you use it to set the bows). These can all be tax deductable and will be required to add up at the end of the year. Any paperwork you receive should be kept in a safe place. Again, that accordion file case is a great tool. Store all your paperwork to include contracts, cancelled checks, bank statements, credit card statements, and written agreements between you and another party together for easy access. These come in handy for several reasons. You might have a contract with a store to buy 100 units of hair bows each month and they do not uphold their portion of the bargain. You now have that agreement readily accessible and can enforce that by legal means. Now the income tax implication would be that you are contracted for a certain amount but were paid in increments. The company claims that a lump payment was sent and you receive a portion of that payment. The company will try to claim the larger amount as a write off and it is your responsibility to keep records to back up your claim that you didn’t receive it. These contracts help the IRS know who was being paid what and on what time schedule.
Regular People and their Tax paperwork
As far as a regular Joe who doesn’t own a business. You will need to keep receipts and paperwork related to your house such as home improvements, upgrades, mortgage contract, mortgage statements, and real estate tax. On your car, you will need the license and registration breakdown where it shows how much property tax, if your state charges it, car payments, and any sales records. You can claim property tax and in some cases a portion of the sales tax dependent upon your state. Any stock or investment statements will need to be kept in a safe place. These are reported as income in some circumstances. As I receive the paperwork and receipts, I place them in the appropriate section of the accordion file and then forget about them until I am ready to do my taxes. It saves a heartache trying to find the receipt for the home improvement that I accomplished in February of last year when I am ready to file my taxes to see if I can deduct it. I don’t have to guess how much labor or supplies were because I will have it in my file folder waiting.
Electronic method over File Folders
Keep track of everything electronically. For those who are technically inclined and want to save space, the best solution might be to take everything a bit more high tech than the old fashion file folder. If you have a scanner that can do a full size piece of paper and a good amount of hard drive space, this will be your best option. I scan all my receipts into my computer and label them according to the date and company. I also keep a log in an Excel spreadsheet listing what was on the receipt in case I need to reference it quickly. This works out best if you have an external hard drive since it is independent of computer crashes and almost indestructible. This might take a little bit of time for you instead of the file folder but it saves space and you do not have to worry about the paper fading. This helps preserve the receipts in case they come in contact with a heat source because many are heat activated and will black out if put too close to the heater.
Helpful Links for your Taxes
- TurboTax® Easy Tax Extension, File an IRS Tax Extension, Federal Income Tax Extension
Use TurboTax to file an extension for your taxes.
- IRS Tax Changes
Tax Changes listed out as they apply to the individual.
- Qualifying Life Event
Publications and general information from the IRS that define life events and shows how they impact Income Tax.
- Sales Tax Deduction Calculator
IRS Sales Tax Deduction Calculator
Further Guidance on Tax Headache
The electronic method, combined with keeping the file, will help you stay organized for the entire year and save you potentially thousands in unclaimed deductions due to being able to itemize your taxes. Just remember to always be consistent with your receipts. Keep your paperwork in the same, predictable place. If you use your computer to help with your tax organization, make sure to backup to a disc each time you add an entry in case your computer decides to be temperamental and misplace your files. Organization is fairly easy as long as you are consistent and follow through with the method, you will reduce your stress level by next tax season. I’ve included some helpful links at the bottom of this article that will help you with what is and isn’t allowed to be deducted. This information will help you decide what you need to keep when making these files, whether they be old fashion folders or electronic.