Turn Last Year's Taxes Into This Year's Financial Spring Cleaning

by Lars Peterson on 18 March 2014 (0 comments)

It's tax time again, the time of year when Americans sift through the pile of papers on or near (and sometimes in) their filing cabinets in search of those elusive tax documents. Where'd the W-2s go? What happened to the 1099 from the bank?

It's also the time of year we promise to do a better job sorting and filing for next year's taxes. Make this year the year you keep that promise. Or take it a step further and make tax time an opportunity to look ahead, financially speaking, rather than only look back at last year. After all, you probably have a clearer picture of your current financial situation right after doing your taxes than at any other time.

Let's start with the tax documents, and then let's look at what else we can tidy up.

Wrangle Your Tax Documents

All that stuff you spent the day tracking down? Keep it in one place for next year. Include a checklist so you can keep track of documents as you receive them — or to know what to go looking for if you haven't. Also include on your checklist some personal info: Names, Dates of Birth, Social Security numbers for you, your spouse or partner, and every dependent you claim. These details will be handy for all sorts of other purposes, too.

Make a Simple Two Folder System for the Key Documents

Make one folder for all of your income documents such as W-2s from employers, 1099s for contract work, for interest income, gambling winnings, income from investment sales, rental income, whatever. Refer to your checklist!

Make a second folder for your income adjustments and credits. Mortgage interest is the big one here, but there are lots — IRA contributions, charitable contributions, education expenses. As you receive receipts and statements for these, just drop them in your folder. Next March or April you'll be ready to go, and probably feeling proud of your sensible filing.

Consider Digital Files

Lots of financial institutions give us the option to receive digital copies of our statements and tax documents — various 1099s for instance, or the 1098 for interest paid on student loan debt. It's cheaper for them, and it cuts down on paper waste. As you receive these, save them in specific folders on your computer (say, "Income" and "Credits"). They'll be waiting for you at tax time next year.

Every year when I'm doing my taxes I have to run out to the garage to take a look at annual car registration fees paid for each of our two cars. This year I've taken snapshots of the renewal documents with my smartphone and uploaded them to Evernote. (I could have just added them to my "Income Adjustments" folder, too.) Next year I won't have to run out to the car. I've done the same with my property tax bills. You can do this for any paper receipts you receive and would like to keep for tax purposes.

Note: Many institutions will charge a fee to access older statements. Check with your bank or lender. If you need to keep copies of these records for your taxes or for retention, be sure to download them and store them safely (whether digitally or as print outs) — and don't forget to back them up.

Reconsider Your Withholding

Most personal finance gurus advise against too much income withholding. Despite that, on average, Americans withhold an extra $3,000 in income tax every year — $250 a month. While it's nice to get a $3000 check every spring, it's not the smartest use of your money. It's not even the smartest way to get a $3000 "bonus" every year.

With the details fresh in your mind after finishing your taxes, visit the IRS' Withholding Calculator and figure out how much you should be sending the government out of every paycheck to bring that refund closer to $500. When you ask HR to make the change, also ask that they redirect the same amount into a savings account. You won't notice much, if any, change on your paystub, but you will have a growing savings account — one that's earning interest.

Create a Basic File System

I've outlined a simple two-folder file system for your taxes above. If you don't already have a file system for the rest of your Important Documents, consider setting one up.

In addition to my two tax folders, I keep several folders for my freelance work as a writer and editor (basically income and expense), and for the household I keep folders for:

  • insurance policies (life, homeowner's, auto, earthquake, flood [beach living!])
  • home maintenance receipts for repairs and supplies, as well as for major appliances
  • bills paid
  • bank and credit card statements (only recently went paperless)
  • mortgage documents
  • passports and Other Important Stuff like SS cards, birth certificates, diplomas, etc.

Start Budgeting

You have all the details on your income. And some of the details on your spending. Why not expend a little more effort to create a budget? Most banks now offer robust online tools for tracking spending on credit cards and to monitor income and spending made through checking, and savings accounts. That's a good start. You can take it a step further by using a service such as Manilla to consolidate and monitor all your bills and help you track your spending.

Evaluate Your Retirement Savings

Can you save more? Can you make a contribution now, before you file, and repay your savings or checking account with your refund? You'll get a break on your taxes, and you will have done something nice for your future self.

Now is also a good time to rebalance your funding allocation between riskier stocks and safer bonds. Depending on the performance of your portfolio over the last year, gains (or losses) have changed the balance of your investment, most likely toward riskier stocks, which may or may not be in alignment with your investment goals and risk tolerance.

Evaluate Your Debt

If you're like most Americans, you're carrying at least a little credit card debt. Maybe a lot. Do you know how much interest you're paying? Do you have a plan for paying that balance off?

Get a handle on those details and start figuring out how to get away from that debt. A good first step is to commit some of your refund to those balances.

Check Your Credit Report

Speaking of credit. You're entitled to one free look at your credit report from each of the three major credit bureaus every year. Don't visit one of those services that advertise on TV with the catchy jingles (they'll try to sell you some other services you may not need). Just go to the only annual credit report website authorized by federal government to provide consumers with reports from the leading bureaus. Find anything amiss? Learn how to correct credit reporting errors.

For more tips on Financial Spring Cleaning, join me and our Senior Editor, Meg Favreau, as well as Kristen Chase of Cool Mom Picks and Marc Karasu of Manilla on Wednesday, March 26 at 3:30pm ET for a Google+ Hangout. The Hangout will answer questions about how to de-clutter and organize your financial life this spring. Whether you’re trying to get your financial paperwork in order to prepare your taxes, or want to do some financial spring cleaning in order to simplify your life, the conversation will provide participants with helpful tips, tricks and digital tools to be more productive, get control of your money, and start spring on a fresh financial note.

This post is brought to you by Citi. Learn more about the tools Citi offers to help simplify your financial life at www.citi.com/mobile

This content is not provided or commissioned by Citi. Opinions expressed here are author’s alone, not those of Citi, and have not been reviewed, approved or otherwise endorsed by Citi.



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