Tax Preparation Made Easy – Tips for Organizing Your Tax Documents and Keeping Stellar Tax Records

Taxes are complicated, but organizing your tax documents and filing system shouldn't be. Use these tips to get organized and make tax preparation easy!
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Organizing Paper Tax Documents

Here’s the understatement of the day: the US Tax Code is complicated. I don’t have any problem paying my share of taxes. But I do have a problem with the complexity of our tax system. Estimates of federal data put the collective time spent on complying with tax laws at 8.1 billion hours in 2016 (the most recent data I could find), a large increase from the 6.1 billion hours in 2012. That is a lot of time to do your taxes!

Many of those 8.9 billion hours were from business tax returns. But personal taxes have become increasingly more difficult to navigate. Our own personal situations may further complicate our tax returns. Being in the military, owning a small business, working as a contractor or freelance worker, having large or complicated investment portfolios, etc.

Thankfully, most tax software programs are powerful enough to do the heavy lifting. But the responsibility still falls on us, as individuals, to ensure our tax returns are done properly.

I recently received a reader question from someone who wants to know how to keep track of their tax deductions and paperwork. I’m not a tax expert, but as a small business owner and member of the Air National Guard, I have a fairly complicated tax situation.

So I’ll share the system I use in the hopes it will help you better manage your taxes as well. This system makes it easier for me to complete my taxes each year. And hopefully, this will also save you a lot of time and aggravation when you file your taxes.

Tax Filing System

How I Organize My Tax Documents Throughout the Year

Everyone has a different tax situation, so what works for me may not work for you. So feel free to use this as a starting point and modify it to suit your needs.

My situation: I am a small business owner and member of the Air National Guard. I also receive W-2 income through my business (meaning I pay myself a salary). I file two tax returns every year: a personal return and a business return.

Organizing Tax Documents

I start by using a large manila envelope and writing the tax year on the outside. As the year goes by, I place every paper in it that may be tax-deductible. This includes charitable contributions, business receipts, and expenses, child care expenses, tax forms, copies of IRA contributions, etc.

Anything and everything that may be tax-deductible goes into this folder.

I also keep three regular size envelopes inside the manila folder:

  • One is for business receipts,
  • Another for receipts related to my home office and other related home expenses,
  • the other is for receipts related to my Air National Guard expenses.

Since I live more than 100 miles away from my base, I can deduct mileage, lodging, and a portion of my meal expenses. I track mileage for my business and for the Guard on separate tabs in a spreadsheet. (I can deduct business mileage against my business and Guard mileage on my personal tax return).

Business and Personal Records Shouldn’t Mix

I keep my business and personal expenses separate from each other, as is required by the IRS. They generally both go into the same manila envelope, but I keep them separate in the individual envelopes.

You can do this with one folder, or multiple folders, whichever is easiest for your situation. Just be sure to keep everything in one place so you don’t have to search for it when the next tax season rolls around.

My business income and expenses are tracked with QuickBooks, which is a business accounting software program. There are many different options, but I started with QuickBooks years ago and haven’t found the need to change to a different service. Depending on your situation, you may be able to track it with a spreadsheet or a different software program.

Digital Filing System for Tax Documents

I also scan copies of all my tax paperwork. The IRS accepts scanned copies of tax-related papers, so keeping a digital backup is a great idea. This becomes more important if you are ever audited. I do maintain both digital and paper copies of my documents.

Paper forms make it easier for me to physically see what applies during the year, and I give copies of the required physical papers to my accountant each year.

The digital files go into a filing system organized by tax year. I keep these files synchronized between my computers with DropBox, which also backs these files up to the Cloud. I also maintain a backup on a physical hard drive, just in case.

Here is a screenshot of the basic folder system I use for keeping digital copies of my tax paperwork:

Digital Tax Filing System

I don’t want to show a screenshot of the actual files, since some of them are sensitive. But here is the naming convention I use to keep track of everything:

  • TaxYear_IRS_Form_Number_Description
  • Example: 2020_1098_Mortgage_Interest.pdf
  • Example: 2020_1099_INT_Insert_Bank_Name.pdf
  • Example: 2020_W_2_Ryan_Business.pdf
  • Example: 2020_W_2_Ryan_ANG.pdf

I maintain digital copies of my business expenses and Air National Guard expenses in folders as well, so I have backup copies of those documents if they are ever needed for an audit or other reason. The naming convention is similar, though I use a slightly different format that includes the full date and a brief description. Here are two examples, the first for business, the second for my Guard expenses:

  • Business Expense Naming Convention: Expense_YYYY_MM_DD_Nature_of_Expense.pdf
  • Business Expense Example: Expense_2019_04_20_Accountant_Business_Tax_Return.pdf
  • Guard Expense Naming Convention: Expense_ANG_YYYY_MM_DD_Nature_of_Expense.pdf
  • Guard Expense Example: Expense_ANG_2019_04_20_Restaurant_Name.pdf

Use a Checklist for Your Tax Situation

Every military veteran is familiar with Standard Operating Procedures (SOPs). SOPs are a great way to document a process so you can repeat it the same way every time. SOPs save time and energy, improve consistency, and remove the guesswork out of complicated tasks.

That’s why I created my own SOPs for my taxes. I can’t share it, since it is personalized to my situation. But I’ll explain how I created it and why it’s helpful.

I created my checklist in Excel. This gives me a spreadsheet I can copy and paste each year into my tax folder (see the folder system above).

In the Excel Spreadsheet, I have different tabs for my personal situation, business, and Guard info (such as mileage and cost of meals, as those are tax-deductible since I live more than 100 miles from my unit).

On my Personal Tab I have a list of things such as:

  • Bank 1099 forms for interest & dividends
  • W-2 forms from my business and the military
  • Tax deductions (charitable contributions)
  • 1098 form for mortgage interest paid
  • 1095-B proof of healthcare
  • etc.

I simply have a checkbox by each item and a column for notes. I check off each item as I add it to my tax folder (either my digital folder or my manilla envelope as mentioned above).

I update the spreadsheet as needed if my situation changes (such as opening a new account, needing a new form, old forms no longer needed, etc.).

Using the spreadsheet method allows me to see how my situation changes each year, as well as avoid missing out on certain forms or information.

I use a similar process for tracking my deductions for serving in the Guard, as well as tracking certain business forms.

Once I have all of my items checked off on my checklist, I know I’m good to forward everything to my accountant (we both prefer that I send everything over at once, as it makes tax prep much easier to process things only one time).

Other Methods for Organizing Tax Papers

Organizing Paper Tax Documents

This is the basic system I use, but everyone finds a different system that works for them. For example, many people put all of their files into a large folder or shoebox, then sort through them when tax season rolls around. I prefer the “work as you go model,” as I find it saves me a lot of time in the long run.

Many people are going all-digital, which can also be a time-saver, provided you use a robust online service, or you maintain backups of your files. Some examples include scanning your documents and maintaining an online backup system, using DropBox, Microsoft One Drive, Google Drive, or a similar system. You can also attach receipts to expenses in QuickBooks or QuickBooks Online.

Shoeboxed is another online company that offers a solution for tax documents and small businesses. Shoeboxed is an excellent tool for small business owners, freelancers, contractors, and those in similar lines of work. It’s a fairly powerful tool that can scan your documents right into QuickBooks.

Which Tax Documents Should You Keep?

Everyone has a different situation when it comes to deciding which paperwork you need when you file your taxes. I err on the side of caution and just keep everything that I might possibly need.

After a couple of years, you tend to get a good idea of which documents you need, and which you don’t. And you don’t have to worry about losing anything of importance when you keep everything in the same physical or digital location.

At a minimum, I keep everything related to business income or expenses, all tax-related documents, including IRS correspondence and tax returns, and anything else that may apply. If I have questions, I ask my accountant when I do my taxes the following year. Other common papers that everyone should keep include:

  • Charitable contributions
  • All tax forms and IRS correspondence, such as W-2’s, Form 1095 (proof of health insurance), 1099s, 1098s, 5498 (IRA contribution), HSA contributions, etc.
  • Taxes paid
  • Mortgage interest paid
  • Qualified business expenses
  • Receipts for qualified deductions
  • Purchase or sale of investments
  • etc.

The list of deductible items is quite extensive, and not something we can list here. These pages list more examples:

The good news is most tax software such as TurboTax and H&R Block @ Home will walk you through a series of questions designed to help you identify which tax deductions you are eligible to receive. So if you do your own taxes, it’s generally best to use a software program to help avoid errors of omission. Note: TurboTax has a military version that is quite good.

If you don’t prepare your own taxes, then a good accountant should be able to help you identify tax deductions. My accountant sends me a questionnaire each year to help me identify which deductions I am eligible to receive. The questionnaire he sends includes questions about homeownership, investments, employment, child care, and much more (it’s about 10 pages long).

How Long Should You Keep Documents?

Most sources recommend keeping your tax papers for the last 7 years, which is generally how far back the IRS will go if you are audited. That said, they may be able to go further back if they suspect there is fraud.

I just keep everything since I have most of it scanned in digital format and digital storage is inexpensive. I also keep the physical documents in banker’s boxes, organized by tax year.

I have the large manila envelope from each year containing the documents listed above, and I keep another manila envelope with my completed tax return. Right now my records only go back about 10 years, which is when my wife and I got married. This was also before I started my business. Since I’m a small business owner, I’ll likely keep all related tax returns as long as I own the business.

There is No One-Size-Fits-All Solution

Every situation is different. Hopefully, yours is less-complicated than mine. My hope is this points you in the right direction to get your tax documents organized. When in doubt, save the papers – it’s better to have a copy of your documents and not need it later than to need it and not have it. And definitely keep everything in one place. Use a manila envelope, a shoebox, a folder, or other means of keeping everything in one place. It will make your life much easier when tax time rolls around next season!

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About Ryan Guina

Ryan Guina is The Military Wallet's founder. He is a writer, small business owner, and entrepreneur. He served over six years on active duty in the USAF and is a current member of the Illinois Air National Guard.

Ryan started The Military Wallet in 2007 after separating from active duty military service and has been writing about financial, small business, and military benefits topics since then. He also writes about personal finance and investing at Cash Money Life.

Ryan uses Personal Capital to track and manage his finances. Personal Capital is a free software program that allows him to track his net worth, balance his investment portfolio, track his income and expenses, and much more. You can open a free Personal Capital account here.

Featured In: Ryan's writing has been featured in the following publications: Forbes, Military.com, US News & World Report, Yahoo Finance, Reserve & National Guard Magazine (print and online editions), Military Influencer Magazine, Cash Money Life, The Military Guide, USAA, Go Banking Rates, and many other publications.

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