Thursday, January 06, 2011

January Thoughts

Every January I get the urge and energy to reorganize my files. To some people, files may seem like an old fashioned collection of useless papers, but let's face it. We do not all live in a paperless environment, and some of that saved paper can actually save us some money. The trick is being able to put your hands on what you need in a few seconds, and this is just about the best reason for keeping clean files and updating them once a year.

A couple of years ago, I had sort of lapsed into a lazy period of continuing along with the same files for three years in a row. It was slowly beginning to drive me mad, so early one January I purged the files of all receipts and paperwork that seemed like something no one in their right minds would ever, ever ask me to produce. I tossed out bags and bags of old receipts and copies of orders. You name it, if it was not directly deductible on my taxes, I tossed it in the can. Then came a notice from the government that there would be a major refund on telephone taxes and surcharges, but copies of telephone bills for the preceeding year had to be attached to the application for a refund. The amount of the refund came to more than $200, and I missed it because I threw out the receipts.

That year I started a new system, and I've worked it the same way every year since then. Here's how it goes...

In December, start collecting new folders, hanging files, those neat little plastic file tabs (from Post-It), a plastic file box big enough to hold all of the previous year's essential paperwork, and some large envelopes and fresh markers. The large envelopes are great to hold an unruly stack of receipts.

Go to an office supply store and choose one of the plastic file boxes with a lid on it, one which has the little lips on either side for hanging files. This way when you open the file box, you can flip through the tax box as easily as you can flip through your filing cabinet's drawer.

On the front of the plastic file box, write the year and any other information. Use big, fat letters so that it is easy to read even if you are standing on your head with a flashlight in your mouth. Never can tell ... For instance, you might label the box 'Taxes: Business & Personal 2011.'

All through the last month of the year, as you close out activity on a category, remove that folder from the filing cabinet and place it in your tax box. Then, prepare a new hanging file for the coming year's notes, label a fresh new file folder with the category and date it, e.g., 'Utilities, 2011.' Do that when you pay the recurring December bills, or when you balance the December bank statement. From time to time, sit down at the tax box and clean out extraneous notes and papers in the folders. Don't throw away important receipts, though, as I did!

When you take your paperwork to a tax preparer, you will be a better prepared customer, and may wind up paying less than those people who come in with a shoebox filled with a mess of receipts and handwritten notes.

I will say that one of the best tax prep ideas I ever came up with was a yearly Tax Diary. It is the one go-to place where I keep receipts of deductible expenses through the year. Now, I am keeping an Excel spreadsheet on the different categories, too. I admit to never deveoping a schedule for filing, and my system is pretty primitive. I toss all unfiled receipts in a basket by my desk, and then one day when they are threatening to topple over, I go through them one by one, enter the amounts/dates/payment method on my Excel spread sheet, and once they are on that spreadsheet, I file them in a folder in the Tax Diary. My yearly Tax Diary has these folders in it: Local Taxes, Medical Expenses, Estimated personal income tax payment, and Donations. All during the year I file any paperwork that has to do with these most important folders. At the end of the year, I print out the Excel sheet and send it along with my other important tax papers to my accountant, make a copy for the folder and transfer the Tax Diary to the tax box for future reference.

January is the time for creating all sorts of new folders for the clean filing cabinet. As I pay bills, I look at that clean corner of my desk and really do not want to see a pile of receipts, so in January I create new folders and file everything right away. That's where I am in the process right now and it feels very good, but I know that by April, the pile will already be a healthy size, and I will have that little reminder going off in the back of my mind telling me it is time to do some filing. Good thing for me that I cannot go longer than a quarter with most of the filing, because there are business taxes to be paid quarterly. That is a sort of natural time to get things back into order.

This is how I keep the paperwork organized. I hope it gives you incentive to try my method, or to improve upon it, for your self.

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