Due to COVID-19, the federal tax filing deadline has been extended. Even with additional time, preparing your taxes is not a fun task. It can be significantly less unpleasant if you are organized. Your taxes involve a lot of documents, and you must keep good records. In addition to your W-2 (or 1099-Misc forms, if you are a contractor), you will need supporting documentation related to your savings and investment accounts. A 1099 is a statement that details the dividends, interest, and capital gains earned during the year. Some investments are structured as partnerships and provide a year-end, or annual, K-1 instead of a 1099. A K-1 shows an investor’s share of partnership income for a given year.
Transactions that you need to document at tax time occur throughout the year. Therefore, I strongly recommend that you keep a Current Year Taxes folder. As you receive tax-related documents in the mail or from a financial firm’s portal, store them in this paper folder or a similar folder on your hard drive. If you are a contractor, save an extra copy of every invoice. You may need to remind a payer to send you your 1099-Misc after year-end. The Current Year Taxes folder is also a great place to keep track of donations and any deductible expenses that you incur during the year. The IRS’s current policy for donations is that you need official documentation for all gifts greater than $250. Make a note of all donations as you make them and save all acknowledgments and thank-you emails. You may not remember a January business expense or a donation you made in May come tax time the next April.
Not only do you need to keep track of these items throughout the year, but you also must retain your tax files for some time. Keep returns and all supporting documents for seven years from the date that you file your taxes, not seven years from December 31st for a particular tax year.
