Tidying Up for Tax Time

There’s a good chance you’ve heard of Marie Kondo by now. Her book and popular Netflix show, “The Life Changing Magic of Tidying Up,” have become a worldwide phenomenon. Kondo has gotten millions of people to keep only the items in their home that “spark joy” by giving them guidance on getting rid of the rest without guilt. People are using the KonMari method of organization not just for the home, but for their entire lives.

So, what does a book about getting rid of old Christmas cards and rolling your socks into neat little bundles have to do with organizing your personal tax information? Surely it’s not possible for taxes to ever “spark joy!”

There are four different categories to focus on when using the KonMari Method of tidying up including Clothes, Books, Papers, and Miscellaneous/Sentimental items (called Komono in the book). The one that’s most relevant during tax time is the third category – Papers.

Kondo doesn’t go into detail when discussing how to determine what papers a person should keep for tax time, so we want to give you all the information you’ll need to make intelligent decisions about what you can get rid of and what you should keep when it comes to your financial paperwork. You can follow this guide and rest easy knowing you’ve reduced the financial paperwork clutter, but haven’t missed anything important.

When trying to determine which documents you will need come tax time, the best place to start is with your prior year return. If you needed certain documents last year, there is a good chance you will need them again this year. Also, as simple as it may sound, if you receive something in the mail that says “Important Tax Document Enclosed,” it’s probably not junk mail and you should hold on to it. Common documents include:

Sources of Income

• Forms W-2 from an employer
• If you are unemployed you will likely receive Form 1099-G which will report unemployment compensation as well as any state or local income tax refunds. Depending on your tax situation, these refunds may be taxable.
• If you are self-employed, you’ll need 1099s from those you are doing business with along with a detailed summary of expenses that you had in your business. It is best to maintain records supporting these expenses.
• If you are an S corporation shareholder, an owner of a partnership or LLC interest, or are the beneficiary of a trust/estate, you will likely receive a Schedule K-1 that reports the income, losses and distributions
• Savings and investments or dividends – look for forms like 1099-INT, 1099-OID, 1099-DIV, 1099-S, 1099-SA, etc.
• Retirement income – reported on 1099-R, 1099-SSA, RRB-1099
• Records of estimated tax payments made
• Records of income and expenses for rental properties

“Above the Line” Deductions

Common deductions that you may benefit from, whether you itemize or take the standard deduction, include:

• Educator expenses
• Health Savings Account (HSA) contributions
• Self-employment tax
• Retirement plan or IRA contributions
• Self-employed health insurance
• Student loan interest

Schedule A Deductions

It is important to note that for the 2018 tax year, the standard deduction increased significantly with the passage of the Tax Cuts and Jobs Act. While it may have made sense to itemize your deductions in the past, taking the standard deduction ($12,000 for single/married filing separately or $24,000 for married filing jointly) might make more sense now. If that’s the case, your typical shoebox of charitable donation and medical receipts might not be needed. Common deductions* for which you’ll need documentation include:

• State and local income taxes paid
• Charitable donations
• Medical expenses and health insurance premiums (if they exceed 7.5 percent of AGI)
• Home ownership related deductions (property taxes and mortgage interest)
• Investment interest expenses
• Casualty and theft losses from a federally declared disaster

The items listed above are not all-inclusive of the documents YOU may need when filing. Check with your tax preparer if you’re unsure if a miscellaneous item you deducted last year is still eligible or not.

*What you didn’t see on this list of itemized deductions are what were known before as miscellaneous itemized deductions – that’s because they are no longer deductible starting in 2018. These include things like unreimbursed employee expenses for mileage, meals, supplies, etc.; tax preparation fees; investment fees; moving expenses, and more.

Reference Files

We recommend that you keep a copy of previous tax returns and documentation as far back as seven years. Just hold on to each of those tax year folders you created. Once you reach the eighth year of reference files, you can permanently delete or shred the oldest file and create a new folder for the current year.

Now that you know what you are keeping and what you can get rid of, the next step in the KonMari method is to organize the things that you keep. Kondo says, “Clutter is caused by a failure to put things where they belong. Therefore storage should reduce the effort needed to put things away…”

These are our tips for organizing the records you keep:

• Go Old School – In January, label a file folder with the current year. As you receive documents or receipts, put them directly in that folder. If you want to get really organized, you can make sub-folders for Income, Deductions, and Miscellaneous, but only do this if you know you’ll keep up with it.
• Go Green – Similar to the old school approach outlined above, but with this clutter-free method, you convert everything into an electronic document by scanning it and saving it to a 2019 tax folder on your computer.

NOTE: Whatever route you choose, make sure you have a backup just in case anything should happen. Natural disasters and computer crashes DO happen. If you are going the paper route, keep a duplicate set of files at an alternate location. If you’ve gone paperless, copy files to a thumb drive or back up to a cloud storage service. Also, make sure you are protecting your precious personal information - Social Security numbers, credit card numbers, bank and even utility account numbers.

Beyond the Paper

The accountant in us can’t help but also leave you with these helpful tax-related pointers:

• If you’re hiring a professional tax preparer, try to have the majority of your documentation sent in by March 15. Even if you don’t think you have every last piece of paper, send in what you do have. If your accountant will be working on your return and you plan to be out for spring break or another vacation, make sure they know your plans and how to reach you if they run into any problems.
• If you’re preparing your own return, make sure you verify the bank account where any direct deposit refund will be sent.
• Check your withholding throughout the year so you don’t find out at the end of the year that you’ve underwithheld and now owe more money than you expected. The IRS’s Paycheck Checkup resource will help you assess where you’re at. In addition, be sure to reference the 2019 tax withholding tables.

Tax Tidying Success

You’ve done it! Now your tax paperwork is as tidy as a KonMari’ed sock drawer. The best part? Keeping tax documents tidy will make your life easier come tax time next year. If someone else is preparing your taxes, it may even reduce your tax preparation fees. And we all know saving money sparks some serious joy!