Tax time can feel overwhelming for many people. Preparing your taxes requires you to manage a lot of information and documents. In addition to your W-2 (or 1099-NEC forms if you are a contractor), you will need supporting documentation related to your savings and investment accounts. A 1099 statement details the year’s dividends, interest, and capital gains earned. 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-NEC after year-end. The Current Year Taxes folder is also a great place to keep track of donations and any deductible expenses you incur during the year. The IRS’s current policy for donations is that you need official documentation for all gifts over $250. Note 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 following 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 you file your taxes, not seven years from December 31st for a particular tax year.
