Organizing for Your Taxes

Everyone dreads doing their taxes.  It can become complicated, you never know if you’re forgetting something, and tracking down all those records can be a nightmare.  With a little organization throughout the year you can help reduce some of the stress of tax preparation and help to ensure that you get every deduction you are entitled.  Well organized records will also help prevent errors that could be costly and time consuming.

When organizing you need to have some understanding of what you need to keep for your records.  There are a lot of tax documents out there such as W2s, 1099s, and 1098s.  When organizing, there are two main categories, Income and Deductions, and then there are some miscellaneous items to keep records of as well.

 

When it comes to income, you need to keep records of all increases in wealth you accumulated throughout the year.  Some of these are obvious such as W2 earnings, interest, stock sales, social security, dividends, self-employment income, and sales of business assets.  Other income items to keep records on might not seem important at first, but will prove vital when you are completing your return.  For instance, if you buy stocks or bonds you should keep records of these purchases so you can determine basis and short/long-term classification when you sell them.  If you have business assets you need to keep records of their purchase and depreciation for when they are sold or disposed of you can determine the profit or loss.   When you are in retail sales you should keep records of your beginning inventory, ending inventory, and all the purchases of inventory you made throughout the year.  If you’re not sure about if you should keep record of something or not ask your tax professional.

There are a lot of potential deductions out there.  Medical expenses, charitable donations, job search expenses, mortgage interest, property taxes, education expenses, employment related expenses, and business expenses are just a few examples.  Again, if you are not certain of your need to keep a record on something ask your tax professional.

Some other items to keep records of are bankruptcy papers, prior year tax returns, and large gifts that are given.  Again, I can’t stress this enough, if you are uncertain of if you should keep a record of something you should ask your tax professional. 

Now that we have discussed some of the documents you need to keep records of we will discuss some options for storing them.  I recommend having them saved in a manner that allows you to transport them easily, especially if you are using a paid preparer.  One option would be purchasing an accordion folder.  Get one that will allow you to label the different folders so you can keep everything well organized.  Look for a folder that allows you to close it securely so that no papers are lost in transit.

If you don’t want to go the route of the accordion folder you could always use the old “shoebox method”, but keep in mind that organization matters.  Just because all the documents are in a pile does not mean that that pile cannot be in some sort of order.  If you use a paid preparer and your documents are not orderly you may end up paying more for the preparer’s time.

Another option for organizing your documents would be scanning them and saving them electronically.  This is my personal favorite method.  I would recommend sorting the scanned documents into a “tax document” folder with sub-folders for each year.  Within each year’s folder I would separate the documents as described earlier.  Being an avid MS Office Excel user I would recommend creating a spreadsheet that would summarize your income and deductions complete with hyperlinks back to your scanned documents.  This way you would have dollar amounts to double check your return numbers with.  

For a tutorial on how to add hyperlinks in Excel you can go here.

This method is probably a bit more involved than many people are willing to be, but it is an excellent way to stay organized and keep tabs on your tax situation as the year progresses.  This way you will be better informed when you are faced with tax decisions, and your tax accountant will be grateful.  

I hope you’ll take some time to organize your tax documents.  It will help take a lot of the stress out of tax time for you, and your preparer.

Job Search Deductions

If you are looking for a new job you may be able to write off the expenses incurred in your job search!  There are, of course, some limitations to these deductions. 

First off, you have to itemize in order to take these deductions.  That means if you don’t have enough itemized deductions to get above the standard deduction ($11,600 for married couples filing jointly, $5,800 for single filers, or $8,500 for head of household filers in 2011) you will not be able to take advantage of these deductions.

The next thing to consider is that this particular deduction falls under the “Job Expenses and Certain Miscellaneous Deductions” which once totaled up are then reduced by 2% of your adjusted gross income (AGI).  This means that if your deductions in this category are not over 2% of your AGI you will not get any benefit from them on your tax return.

The last thing you have to take into consideration before using these expenses as a tax deduction is if the job you are doing your search on is within the same occupation as your current occupation.  In order to use this deduction the job you are seeking must be in the same field as your current occupation or your most recent occupation (if you are unemployed) provided there was not “a substantial break between your last job and when you began looking for a new one”.  This means if you are looking for your first job you cannot write off the expenses.

So, if you expect to have enough deductions to get over the standard, will have more than 2% of your AGI in this category, and the job you were seeking was in the same occupation what should you be keeping records on as far as job seeking expenses go?

• You can deduct employment agency fees.  If your employer then reimburses you these fees you must include the reimbursement in your income.
• You can deduct the costs associated with creating and mailing resumes and cover letters to prospective employers
• You can deduct travel expenses to and from the area you are seeking a job in, but only if the travel is primarily for job seeking and not for personal pleasure.

So, that is job search deductions in a nutshell.  If you have any questions or comments about job search deductions go ahead and contact me and I will do my best to respond in a timely manner. 

How to Adjust your Tax Withholding

We all, unfortunately, have to have taxes withheld from our pay since our tax system is a pay as you go one.  So, how do you know the right amount is being withheld?  For starters you can look at your last year’s tax return.  If you got a large refund or owed a large amount in to the IRS than you probably should look into the amount you are having withheld.  Also, if you have any changes that may affect the amount of tax that is owed on your next return you may want to look into changing your withholding.

So, what might cause your tax liability to change from the last year?  Here is a helpful list of some common items that may trigger the need to change your withholding.

• You got married or divorced.
• Your spouse left or got a new job.
• Your dependents change.
• Purchased or sold your home.
• You took on or left a second (or third!) job.

Now that you have determined that you may need to change your withholdings how do you go about finding out what to change it to?  Luckily, the IRS has a handy calculator to assist in finding out what you should claim on your W4 form.  You can find this calculator here.  

Remember, if you choose to you can always increase your withholdings if you would prefer to have a larger refund when April comes around.  Some people like to think of it as an interest free savings account.  Personally, I think of this system as more of an interest free loan to the IRS, but to each their own.