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- While tax season comes around just once per year, I'm always taking small steps to make my future tax preparation easier.
- Staying organized with digital and physical folders helps me keep my tax documents at my fingertips and save a ton of time when entering my taxes online.
- Spending a few minutes on your taxes and related files every month could save you money when it comes time to prepare your taxes.
- TaxAct is currently offering 35% off on Federal and State returns »
While Americans get some extra time to do their taxes this year due to the COVID-19 outbreak, I had my taxes done before the virus shut down the country in March. Thanks to a year-round effort to keep my tax files organized and updated, getting my fairly complex taxes put together isn't an enormous effort.
I use some tax-prep hacks throughout the year to make tax time an easy and low-stress experience. Adding these habits to your tax-planning routine can save you time and even money when filing your annual tax return with the IRS.
1. Keep a folder for tax-related papers and statements that show up in the mail
While I've mostly gone digital for my tax forms, some banks, investment companies, clients, and nonprofits still send out paper tax forms including 1099s and donation receipts. Some of these are required for your tax return and others can lead to tax savings. It's important to keep these somewhere safe so that you can find them when you're ready to do your taxes.
I have a small file cabinet in my office with a hanging manila folder labeled "IMPORTANT TAX PAPERS." Every qualifying important tax paper goes into the folder until I do my taxes at the start of the next year.
Pro tip: If you want to make your life easier and you're into going paperless with your personal finances, you can always scan these papers into your computer for a fully digital tax-prep experience. Just make sure to drop the old forms in a shredder to avoid identity theft.
2. Maintain a digital folder for tax form PDFs and other digital documents
I personally prefer paperless tax forms over paper forms. It's more secure and better for the environment. I also find them more convenient, as I'm on my computer a lot more than I'm in my file cabinet.
I keep a secure Dropbox folder with my tax forms going back as far as I have them. Every year when I finish my prior year's tax return, I create a new folder for the next year. So now, if a form shows up that I need to save for my 2020 taxes, for example, I have a digital place to file it.
Pro tip: Saving your tax forms in an online folder using an app like Dropbox or Google Drive keeps your files backed up in case your computer is stolen, damaged, or suffers a hard drive failure.
3. Stay caught up with small-business bookkeeping
I work as a freelancer with my own business, and my business income is a huge part of my tax preparation. But while many business owners scramble to go through receipts and put their financial statements together just before tax time, I keep my QuickBooks accounting records updated throughout the year.
It takes me about 10 minutes every month to update all of my transactions and record the income or expense in my business accounting software. When it's time to do my taxes, I can just export a profit and loss statement and balance sheet and I'll have everything I need to prepare my business tax return.
Pro tip: It's a good idea to update your accounting records at least once every month. This gives you valuable insight into your business performance that could lead to higher profits.
4. Track investments to avoid short-term capital gains
I'm far from an active trader, but I do occasionally decide the time is right to sell one of the stocks or funds in my diverse investment portfolio. I'm mostly a buy-and-hold investor who keeps a very long-term outlook. But when I do make a sale, it's important to take note for my taxes.
If you hold an investment for less than one year, you're probably going to have to pay a higher tax rate (short-term capital gains tax) on profits than investments you hold for a year or longer. If I'm thinking of selling an investment and it's near the one-year mark, I may decide to hold it a little longer to get a more favorable tax treatment.
Pro tip: When you sell an investment for a loss, it can offset future investment gains. Keeping good tax records help you make sure you don't miss out on carried-over capital losses from year to year.
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