Getting organized is the first step in filing your taxes

Getting organized is the most important step in filing your taxes and sleep well

Even if your tax situation isn't complicated, there's still documentation the Internal Revenue Service demands. But tax filing doesn't have to be an ordeal. In addition, it can be less frustrating and less time-consuming if you have all the material at your fingertips.

Much of the paperwork you'll need to fill out your Form 1040 will tell the IRS how much money you made so they can tax it. However, there also is information that will help you trim your tax bill.

To help you get a head start on organizing your tax paperwork, here is some of the most common documentation you'll need. Some may not apply to your taxes this year, and you won't get some until the end of January. But when it comes to filing your tax return, there's no such thing as planning or being too prepared.

File by the (identification) numbers
The IRS tracks every taxpayer through a Social Security number. For those of you who file your own returns, this isn't a problem. But if you drop all your data off at your accountant's office, make sure that your Social Security number is in there, as well as your spouse's if you file jointly.

Do you have any dependents -- children, parents -- that you'll be claiming? Then you'll need those numbers, too. This includes everyone, even infants. If your kids don't have their numbers yet, contact the Social Security Administration immediately. A missing Social Security number for any person listed on your return could cost you.

The IRS could delay the processing of your return, slow down any refund, or even disallow a credit if you don't have the identification numbers to support it.

In addition, don't forget the tax identification number of the person or business that takes care of the kids while you're at work. You'll need it if you file for the childcare credit. You should receive a statement from the care provider that includes his or her tax ID number, as well as the amount you paid, so you can use it to claim the credit.

It is called an income tax
Since it's our income that the taxman wants a piece of, start thinking about the employment and income data you'll need to file.

By Jan. 31, employees should get a Form W-2 from the boss showing how much was earned, how much is taxable and just what taxes were withheld. If you have more than one job, you should get a Form W-2 from each employer.

You can get an idea now of what your W-2 will say by checking your pay stubs. In addition, hang onto the last one of the year so you make sure that your official tax form data is correct when it does arrive.

If you're an independent contractor, the company you worked for should send you a Form 1099-MISC showing your gross earnings.

If you're self-employed, you have a bit more work to get organized. Track down all receipts and documentation for business-related expenses, from the mileage records you kept when using your car for business to the office equipment and supplies you bought to the utility bills you paid to keep the home-office lights on.

IRS interest in your other assets
Wage income isn't the only earnings that the IRS taxes. Are you saving money for your kid's college, a new house or retirement? Good for you -- and the taxman. Interest earned on most savings accounts is taxable.

You should get statements from each of the account holders, as well as formal tax forms. Copies of the forms also go to the IRS.

If you've branched out into stocks or mutual funds, you should get a Form 1099-DIV for each stock, mutual fund or money market account. Reports on the proceeds from broker transactions, if you use one, will be sent to you on a Form 1099-B.

Just like with your final paycheck stub, hang onto your year-end financial statements to compare with the official final tax documents.

That pesky miscellaneous income
Did you get a state tax refund last year? Did you rent out that old house you fixed up? Did you finally settle into retirement thanks to those monthly pension checks? There's a place for each of these on your tax return, so start getting this paperwork in order, too.

State and federal tax collectors work together. In the case of state tax refunds, that means the Form 1099-G you get detailing your refund also goes to the IRS, so hang on to your copy and report it.

Rental property can provide a nice boost to your balance sheet. However, make sure you keep track of all it cost you to keep your tenants happy. These expenses can be used to offset your rent income, and that means less of your investment property earnings are taxable.

Some retirement payouts are taxable, at least in part. To help you determine exactly how much you owe you'll get a Form 1099-R showing how much was paid to you during the year.

However, what if it wasn't such a good year financially, let's say you were out of work for a while and collected unemployment. Sorry, but unemployment is taxable. You'll get a separate Form 1099-G for this, so it needs to go into your filing preparation package.

Tax trimming starts at home
OK, you know what information you'll need to report your income. Now it's time to do the pre-filing preparation that could help you trim the taxable amount.

Homeowners know the value of a mortgage. Not only does the loan get you into your house, but also the interest you pay on it is deductible. Your lender will send you a Form 1098 with this amount. You can check out your loan amortization schedule and get an idea of just what the deductible interest amount will be.

If you made an extra mortgage payment at the end of last year to up that interest amount, make sure it's counted. Sometimes lenders use automatic reporting programs that overlook extra payments. You can still claim the extra interest; just make sure you document it in case the IRS follows up.

Mortgage interest isn't limited to your primary residence. If you have a vacation home, interest on that loan will be on a separate Form 1098 -- and is just as deductible.

And don't forget the interest you paid on a home equity loan. Your yearend loan account statement will tell you how much this was, and in most cases it's deductible on your Schedule A, too.

Using taxes to reduce taxes
Homeowners get another way to reduce what they pay to Uncle Sam -- using the real estate taxes they pay as a deduction.

If part of your mortgage payment each month includes an escrow amount that's used to pay annual real estate taxes, then the 1098 form you get from your lender also will tell you this amount.

Then there are any state and local income taxes you paid. Check your W-2 for this information, and be sure to deduct it, too.

Don't own a house? Don't despair. There's still a tax deduction opportunity for you if your state or county charges a personal property tax. Most often, this tax is on autos, so if you pay, make sure the collecting tax agency sends you a statement showing how much so you can put it on your Schedule A.

Work expenses can cut your taxes
Did you look for a new job this year? Kept your job, but had to shell out for work-related items? Move to take a new job?

All of these situations can help reduce your tax bill, as long as you've got the documentation. In the case of job searches, find those receipts for anything related to your hunt -- as long as you're looking for work in the same field.

If you kept your current job, but had to pay for some items that your boss didn't reimburse you for -- travel expenses, uniforms, union dues, subscriptions -- then these can be deducted as miscellaneous items on Schedule A. Again, you'll need the receipts, so go through your paperwork collection carefully.

Good works, good records, good tax break
Good deeds can be their own reward; they also can reward you at tax time.

Cash donations to qualified charities can be deducted, and you should get a note from the charity acknowledging your gift if it was $250 or more. You'll need that receipt you got when you dropped those clothes and books off at the local Goodwill collection center, so you can claim a deduction.

But you also can get credit if you volunteered at the local soup kitchen. No, you can't deduct the value of your time, but if you drove there, then you can deduct that at 14 cents per mile as a charitable gift. Documentation of your effort can be as easy as a notation in your calendar of the days you worked and where the shelter is located.

Accurate taxes require accurate information
Now that you know what data you'll need to file your taxes you've taken a big first step in the process.

By knowing what information you need, digging out those documents now and keeping an eye on the tax-related forms as they arrive in the next few weeks, you'll immediately realize if any are missing. If that's the case, you'll still have plenty of time to track down the documentation -- saving you time, anxiety and possibly money when you file your return

Nothing lasts forever, but you wouldn't believe it by looking at some people's recordkeeping systems. Prolific pack rats insist on keeping every scrap of paper, just in case.

In addition, when it comes to tax paperwork, folks are even more adamant. These documents will save me, they argue, if an Internal Revenue Service auditor comes visiting.

There are limits
When it comes to tax-related documents, you should hang on to records that help you identify sources of income, keep track of expenses, determine the value of property, prepare tax returns or support claims made on those returns. However, common sense -- as well as storage space -- should be your guide.

The rule of thumb for tax papers is hold onto them until the chance of audit passes. Usually, this is three years after filing. Nevertheless, if the IRS suspects you underreported your income by 25 percent or more, it gets six years to check into your tax life.

That's why most accountants advise taxpayers, even those who are meticulous filers, to keep tax documents for six to 10 years.

Use it or lose it
This means 1040 forms and any accompanying tax schedules, along with the documents supporting the return, such as W-2s, 1099 miscellaneous income statements and receipts or canceled checks verifying tax-deductible expenses.

However, don't go overboard. If you used something to claim a deduction, keep it. If not, toss it. For example, all those medical bills are useless -- and just taking up space -- if you didn't accumulate enough to meet the deduction threshold.

Some items, however, have a longer shelf life. These generally are assets that a taxpayer will eventually sell, triggering a tax bill. Therefore, if you have a pension plan, own a home or invest in the stock market, tax pros recommend keeping these records indefinitely. Or at least until three years after you dispose of the asset.

Housekeeping -- and selling -- records
For most taxpayers, the biggest asset -- and potential tax bill -- is a home.

While the tax rules for home sales have changed in recent years, meaning sale profits don't automatically face IRS charges, any paperwork relating to a residence should be kept for as long as the home is owned.

Single home sellers now can net capital gains of $250,000 (double that for married couples) before owing the IRS. To determine whether sale profits fall within the tax-free limits, the seller must accurately establish a residence's basis. That means that records related to a home's value -- settlement papers and receipts for improvements and additions -- are critical.

In addition, if you sold a house before May 7, 1997, that could affect your current home's basis. With home sales from three years ago, taxpayers were able to defer tax on any gain by using the profit to purchase another home and filing IRS Form 2119. You'll need that information, and those old forms, Durand notes, to figure the current property's basis and any tax bill when you sell it.

Taking stock of investments
Fast on the heels of home sales as tax triggers (and recordkeeping headaches) are stock transactions.

But with online trading, people are investing more. Keeping track of a CD or two wasn't that difficult, but when you move on to stocks, the tax recordkeeping becomes critical.

Investment account statements contain financial data that a taxpayer will need as long as the stock or mutual fund is owned. On the stock side, there may be splits that change the value of the holding and therefore the eventual worth of the stock, which is used to determine the taxable basis.

For mutual funds with reinvested dividends, owners pay tax each year on these earnings. These taxes are used to increase the funds basis so when the fund is sold, the final tax bill will be less. Without statements, it's easy to lose track of those payments, notes Durand, and a fund owner could inadvertently pay double taxes on earnings.

Retirement record requirements
And then there are all those retirement savings plans, with all those different rules.

Contributions to traditional IRAs often are tax-deferred. However, sometimes already-taxed money goes into these accounts. What happens to your taxes when you reach 59-1/2 and start taking money out?

Statements from IRA fund managers should note whether contributions were tax-deferred or already taxed. The financial reports also keep track of the tax-deferred earnings, compounding year after year. These documents can help you make your case to the IRS when it comes time to pay the tax bill, so hang on to them all for as long as you have the account.

IRS Form 8606 also can help track retirement plan taxes. This form, which is filed only in the years that non-deductible contributions are made, calculates the taxable basis of an IRA. File and keep copies of each 8606 with your retirement plan data.

Business considerations
If you operate a small business, from a moonlighting job to a small operation with several employees, dealing with records becomes a bit more complex. Even then, it doesn't have to overwhelm you.

Rudo notes that the IRS generally focuses on self-employed travel and entertainment expenses, scrutinizing returns to make sure all the expenses are really related to the business and can be proven. In these cases, complete and accurate -- but not overdone -- contemporaneous records need to be kept until the audit threshold passes.

Durand adds that, unlike personal bank statements, business financial account records should be kept permanently. Similarly, anyone who has employees should hang onto employment information and related tax returns for as long as the business is running. Moreover, don't throw out articles of incorporation, company bylaws, stockholder minutes, and trademark and copyright applications.

Pick a system, any system
Once you've identified critical records, the next step is to decide how to keep the data. Electronic bill paying can help keep track of your financial and tax life, but so can a plain old check register, as long as expenditures are entered faithfully.

It doesn't matter if it's a filing cabinet, cardboard boxes or a complex computer program. The key says organizational expert Barbara Hemphill, is find your recordkeeping comfort level, pick a system and stick with it.

In addition, when it comes to taxes, it's even more important to be proactive in recordkeeping, adds Hemphill, who has been advising folks on ways to get their lives in order for almost a quarter century. Start now, she advises, rather than waiting until April's tax filing deadline. Such diligent organization could make any IRS examination easier.

"In any kind of audit, I've found the IRS is more forgiving if you make an honest mistake rather than if you're sloppy or fraudulent," says Hemphill.

However, she, too, cautions against going to the extreme. All it takes some reasonable evaluation of your piles of paper and a little bit of common sense.

Basic records are documents that everybody should keep. Although the Internal Revenue Service doesn't require you to keep your records in a particular way, it does urge taxpayers to keep them "in an orderly fashion" and in a safe place.

FOR items concerning your ...	KEEP as basic records ...
Income	· Form(s) W-2 · Form(s) 1099 · Bank statements · Brokerage statements · Form(s) K-1
Expenses	· Sales slips · Invoices · Receipts · Canceled checks or other proof of payment
Home	· Closing statements · Purchase and sales invoices · Proof of payment · Insurance records · Form 2119 (if you sold a home before 1998)
Investments	· Brokerage statements · Mutual fund statements · Form(s) 1099 · Form(s) 2439

IF you ...	THEN the period is ...
1. Owe additional tax and situations 2, 3 and 4 (below) do not apply to you	3 years
2. Do not report income that you should and it is more than 25 percent of the gross income shown on your return	6 years
3. File a fraudulent return	No limit
4. Do not file a return	No limit
5. File a claim for credit or refund after you filed your return	Later of 3 years or 2 years after tax was paid
6. File a claim for a loss from worthless securities	7 years

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