Preparing a Personal Income Tax System

Though we’re just coming to the end of the 2017 tax return season, it’s not too early to get started on organization for the 2018 tax year. There are some changes coming, and while one of the big revisions should make returns for most people easier, anyone can benefit from setting up a modest income tax system to stay organized throughout the year.

One of the most significant changes is to the amounts for standard deductions. These are increasing enough that some taxpayers who traditionally used the itemized deduction method to prepare their returns may find the effort wasted, since the new standard deduction amounts cover any gains provided by itemizing.

Prepare to itemize – whether you do or not

However, I strongly advise that everyone who pays taxes should organize themselves as though they will use the itemized deduction method, regardless of how they usually prepared their returns in the past. The reason for this? No one can read the future.

Perhaps the most obvious reason to hedge against the future is medical expenses. When these exceed 7.5% of your adjusted gross income, you can benefit from deductions if you itemize. Now, you may be in fine health now with medical expenses nowhere near the 7.5% number. However, tomorrow you may have a car accident, or next month you may be diagnosed with cancer. These or other situations can cause your medical expenses to skyrocket, even with good health insurance coverage.

It’s not just medical costs either. If you buy a home or perhaps a second property for vacationing, mortgage interest may be substantial enough to make itemizing attractive. Any changes to expenses that could be itemized can significantly add up to tax savings. If you’re still better off using the standard deduction, there’s no harm done by keeping the extra documentation.

The Right Subcontractor

There are likely millions of Americans that have a single file folder labelled “Taxes” into which anything relevant may or may not be filed. In April, the contents of the folders is dumped out and sorted in a pre-1040 sorting ritual. If that works for you, great. However, what if you could subcontract that sorting job out to someone else, whose knowledge of your tax position is the same as yours?

Well, you can. That subcontractor is also you, but it’s you today, able to do all the sorting now and throughout the year. When it’s time to complete your 2018 return, everything can be ready and sorted, at your fingertips when you need to reference it for your 1040.

A Personal Filing System

There’s no better time to set up a dedicated tax filing system than April or May. First, you’ve just finished your return, so the various categories you need are fresh in your mind. You also have receipts and documents from the first quarter of the current calendar year, so there’s contents to test run your filing system and identify any changes that would help refine your system.

Here’s what you need to make a tax filing system work:

  • A desktop file organizer: head to your favorite office supply store and purchase an organizer. Aesthetics are important. For your system to work well, these files need to be out in the open, where you’re constantly reminded to feed them receipts on a timely basis.
  • A supply of file folders: again, don’t go cheap. Choose premium folders in colors you like. You’re more likely to use a system that looks sharp. Put the effort in now and filing will seem to care for itself. I recommend two colors: one for revenue items, and one for expense items.
  • Folder labels: these are optional but can give a professional, polished look.

Your final step is to prepare your folders. This is where your current year tax experience pays off. You know what categories you need. Simply match folders to each expense category you used for your current tax return, even if you had only a single receipt. Consult with me or another tax accountant if you need a comprehensive list of itemized deduction categories, or find an online resource that provides this information, to assure you capture everything that may be eligible.

The Filing Routine

No system works if it isn’t used, so get in the habit of filing receipts as you collect them. Some people suggest a “to be filed” folder for the front of similar systems, but I say no. Handle the receipt once. Tax time sorting is then done automatically, by you, and way ahead of next April. You may still choose to take the standard deduction. However, you’ll never regret having sorted itemized receipts on hand – just in case.

About Paul Gaulkin CPA

Paul Gaulkin is a Certified Public Accountant and enrolled with the U.S. Treasury to practice before the IRS. Mr. Gaulkin possesses unique technical knowledge in the process of securing relief for taxpayers nationwide with IRS and State tax problems. With an accounting degree from Florida International University, he is able to transform complex tax and accounting problems into easy to understand solutions.

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