Organizing Your Financial Papers – Part 1 Preparing for tax time

Part 1 –  Preparing for tax time

Running a family is very much like running a business. We make projections,  purchases, plans and provisions for the future.   In order to do those things,  we need basic financial information.  Without it, we are operating in the dark, missing who knows what opportunities.  Every family needs to know:   what are the sources of our income and how much does each source provide, what is the total expenditure of our financial resources and where is it going, how are we going to manage income and expenses  to maximize our finances.  Each family needs plans for emergencies and for the future.  The basics of all this information can be found in the material gathered for tax preparation.

If you gather information as you go along and as the year end paper work comes into the house, tax preparation flows smoothly. Even better – with just a little more work, I can show you how to use tax information as a foundation for all of the other important family financial functions!  You get a whole lot more for the time invested in gathering tax documents!  Makes it even more worthwhile!!!!  And exciting – well, almost.  So let’s get started —-and check back each of the next few weeks for more information.

First – designate a catch spot for those documents to support itemization**  on your tax return. If you know you will not be itemizing, don’t worry about this step. In general, if you do not have mortgage interest, property taxes, large charitable contributions and/or high medical expenses, you likely will not be able to itemize.  However, your situation is unique to you.  If there is even a remote possibility that you will itemize, avoid the headache and save the receipts.  You can’t claim what you can’t document!

Designating one place to collect information throughout the year will save time and energy.   Receipts for medical copays, charitable donations (those bags you drop off at Goodwill, statements from nonprofits, etc), property and real estate tax receipts – all those things that can add up to a larger refund.    You can use an envelope to catch them, a box in a drawer, a basket on the shelf, a drawer that holds nothing else. I like to have a way to enclose those little pieces of paper to keep them from drifting out and getting lost.   Whatever you use, keep it some place that is easily accessible.   Drop those receipts in the minute they come out of your purse or pocket.  You can sort them into categories or not as you save them — the important thing is to hang onto them and to have them in one place.

Right after Christmas tax documents begin to arrive and continue through the month of January.  Every piece of paper that comes into the house with tax information goes directly into your designated spot.  Add to it any information your tax preparer requests or that you know you will need for your particular situation.  I like to keep these separate from the itemization papers.   For several years, I stored year end tax papers behind a little chest that sat on my kitchen counter where I could stash papers together and unseen.  An advantage of keeping these papers separate is that you can tell very quickly what documents have not yet arrived.

If you receive statements electronically all you need is a designated file on your computer. Again,  add documents to your designated files immediately as they become available to you.  We get a mix of paper and electronic statements, so I choose to print the electronic statements and add them to the file.  This reduces the chances of forgetting something when it is time for actual tax preparation.   Adding information to your main file as it comes in only takes a few seconds each time,  but  will save you a huge hunk of time hunting them down at tax time.

By the end of January, you should have received income statements from each of your particular sources of income.  There should be a W-2 form for each person in the family who works outside the home.  There should be 1099 statements from banks and other financial institutions, miscellaneous income sources, unemployment or social security, any place from which you received income.   You should have 1098 statements for expenses such as student loans and mortgage interest.  These will vary depending on your particular situation.     Statements are required to be furnished to you and to the IRS by law.  You should receive them automatically.  If you don’t for some reason, then you know you will have to do some followup.     Add the itemization documents, which you have  sorted into like piles, and any other documentation that pertains to your situation.  You will also need the full name and Social Security number of everyone in the family and direct deposit information for your bank account.

It gives you and your family a huge advantage to do your own taxes if at all possible.  It is not that difficult – although we can all think of a dozen other things we would rather be doing!!!!!   The EZ forms are just that — very easy and if you are eligible for those, you can certainly handle them yourself.   There are a number of software programs that are quite easy to use for many, if not most,  tax situations.   They do all the calculations for you so very little math involved.  They are designed with questions and prompts to accurately assess your situation and produce an error free tax return.  If you have an unusual tax situation in a particular year, it is certainly worth paying someone else to help you find your way.  It can also be helpful to hire someone if you have a number of different investments or other complex situations.  A professional will stay abreast of changing laws and can save you money in the long run.

Whatever method you choose,   every person who signs the tax return needs to be involved.   If one person does the actual preparation using the “married, filing jointly” designation,  it does not give the other an excuse to ignore the whole process.   Nor does it matter the size of the family or the number of wage earners.  The information that goes into preparing for taxes  gives  an understanding of the family  financial situation in a very concrete manner.  It is information that is crucial to family well-being.

 Click here for a list of  documents needed for tax preparation.  Your situation will determine which specific documents you will need from this list and may require some that are not listed.  I am not a tax expert, so it is  only  a general guide.   And —- will become the foundation for the next steps in this series.  Tax time can provide invaluable information about your income, many of your fixed expenses and an opportunity to review and plan ahead.  And can provide the basis for other financial actions and decisions.

Part 2 – In Case of Emergency – tips and forms for others to help with your affairs in case of emergency.  Going through the first two steps will help with the next steps.

Part 3 Plan the Life You Want – how to set financial goals. Use the information you’ve already gathered to help you determine how to fund your dreams.

Part 4 Develop a Spending Plan — tips and forms for setting up a budget.

Part 5 Be Prepared — tips and forms to prepare a go kit in case of evacuation for natural disasters, such as flood, hurricanes or wildfires

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