After a few years of running a home-based business and managing the paperwork for it, I started to convert the systems I learn as a business owner into household systems. Combining that knowledge with that of budgeting and budget tracking, I came up with a way to make my tax time easier. It does involve diligence and discipline while the system is transitioning from something new in to a habit. But it is worth it.
Determine What YOU Need to Track
I went over the basics in Taxes Made Easier: Know What to Keep for Your Records and for the most part these pretty much apply to everyone. That said, everyone and their situation is unique and situations change.
For example, as a home-based businesswoman, I have the privilege of quite a few deductions that are not within the norm of deductions (I’ll go into more detail on that one in a future post). And until I became a home owner, the business and the personal were pretty easy to separate. But as a home owner with a home based business, I now can deduct my office and its physical expenses such as portion of my mortgage, my property tax, my utilities’ costs, and so on. When I married my husband, he was divorced so I needed to track spousal support payments for a short period of time. And with a teenager not so far away from going to college, I will need to start tracking new expenses.
Write down ever expense and income category you should track. Be specific. Don’t just say charities. Rather list the specific charities you generally donate to each year. List each interest bearing account. And so on. Your tax professional can then go over your list with you and discuss where you can be more general such as medical expenses versus specific medical premiums, co-pays, prescriptions, travel, etc. Once done, you know EXACTLY what to track. Remember as you add or subtract dependents from your life, change businesses, start or close a business, have someone seeking higher education, etc. to talk with your tax professional to see what revisions you need to make to your list.
Create a Template
I know some people are intimidate by Excel or its Apple equivalent, but when it comes to tracking and managing paperwork, its awesome. I actually use an excel template I create to set and track my monthly budget, and well a few other things. Having the template allows me to quickly and easily start a tracking sheet each year.
Create your template so that you include the following information:
General Categories with their specific subcategories:
Make sure to have at least TWO columns – Income and Deductions for column one and Total for column two. Five would be better as to include any purchases/sales of assets and dates as well as notes area.
You don’t need to include the following on your template because odds are if you have the same account, they already have it. But if your situation changes such as a new baby or aging parent as a new dependent or a divorce or marriage, you will want to update this for your accountant.
Your and your dependents names and social security numbers
*If you are legally supporting someone such as a former spouse, their name and social security number
Tracking and Managing the Paperwork
Now that you have your template in place, here is how I track. Since I am already reviewing receipts and paying bills to manage my budget, I go one step further with my taxes. Once I have entered a receipt into my budget, I determine if it is related to my taxes, if I need to track it. Then I go to my tax tracking sheet (the template I talk about above) and enter it into the proper category. The formula is pretty simple and you can keep adding. It does the math for you. In the appropriate column and in the appropriate row cell, type = (amount)+(amount) so that it would look something like this –
You can keep adding to it by simply + and the new receipt total. At the end of the year you have all your totals in one easy to print out area.
Filing for Easy Access
Once you enter the receipt, its a matter of filing in any easy access area. If you have been with me a while, you know I set up my filing systems in my Project Organization Series – Purging, Creating the System and Putting it Together. One of the things that I did when I assembled the system, besides creating dead space for old taxes, was to make sure that my file system had my tax categories included. I have a current year tax information file that houses all my single sheet year end reports. I also have a Charitable Donations folder. And under my Medical Section, I have Expenses with specific folders for Premiums, Co-Pays, Prescriptions, and Dental Expenses. I generally include everything other than dental such as vision, mental health, etc. in the first three categories and all dental and orthodontic under dental. And the same for the other categories.
At the end of the year, all I have to do is pull these from their respective folders and put them in that year’s tax folder in dead storage. I’m ready for my tax appointment and makes my accountant’s job much easier.
With April just around the corner for 2014 filing and nothing we can really do about it, I look to 2015 to maximize my refund. What can I say? I would rather keep my money instead of give it to the government. So in my next post, I will share some ways to maximize your refund.