Spring Cleaning Your Tax Files

by Molly Boren

No more searching for receipts or puzzling over IRS-speak-it's all nearby and understandable. Think this is just a dream? No sir: this could be you, and now's the perfect time make it happen. In April not only is spring in the air but so are taxes. Take control by creating your ultimate record-keeping system.

1. Setting the stage

First, decide how you'll store your tax files in your new, fabulously organized life. If the papers necessary for figuring your most recent return aren't already adjacent to the desk or table where you pay your bills, etc., find space for them there in a filing cabinet, rolling file cart, binders with pocket pages or an accordion file. If necessary, store them elsewhere in a portable file box to be toted to your desk when you're ready to get down to business.

Consider color-coded folders or binders, which  will make every tax file identifiable in a split-second, saving time and decision-making energy-and a pretty color or pattern makes any activity more enjoyable, even filing.

Next, set aside a couple of uninterrupted hours and clear a workspace in your bill-paying area. Gather all of your tax-related papers there, past and present. Once everything's centralized you won't get sidetracked by house-wide document hunts.

2. Archives

Bring order to this forest of paper by separating your old tax returns from Current Year papers. (If you haven't yet filed for 2006 but already are collecting 2007's papers, keep the latter in their own folder until you've closed out '06.)

Fill your tax archive with returns from the last seven years-the time during which the IRS can audit you-and their supporting documents. If you have returns from 1999 or earlier, you might be able to free up some storage space, unless you'll need them for, say, legal or insurance purposes.

Be sure to shred any documents you discard. Shredders cost $25 to $50, or you can use a shredding service ($0.35 to $0.75/lb).

Label your remaining archives boldly and stow them in the least accessible part of your tax file storage area, since you won't refer to them often. For the same reason, there's no need to create inner folders or tabs for each year's return. Always prioritize ease of filing over ease of retrieval (without compromising accuracy).

3. Current Year tax file

Here's where the action is. The key to making your Current Year file really work for you is to consider why you need these papers and then to record your conclusions.

Avoid duplicate decision-making whenever possible, in filing as in life.

So why do you need these papers? To prove your income and your tax-related expenses. Therefore, begin by creating subdivisions within your current year file: "Income" and "Expenses."

But which income and which expenses? Each situation is different, but your most recent 1040 or 1040-EZ (and its attached schedules and forms) is an excellent blueprint. Unless you expect great change-in which case you'll want to develop a record-keeping plan with your accountant-draw your further Current Year tax file subdivisions from these. One caveat: Even if you haven't itemized, collect documentation of deductible expenses (see Form 1040's Schedule A, www.irs.gov). An unforeseen event like a theft could make itemizing the way to go this year. Also, seek out information about new credits for which you might be eligible.

Now write hints about what papers go into your Current Year file directly onto each tab or label or pencil longer instructions on the folder itself. You might even keep a copy of the relevant tax form there. Capture your knowledge right where you'll need it and you'll avoid reinventing the wheel next April.

Instead, you'll be sitting back, relaxing and enjoying spring.

Sidebar 1:

Less Paper, Less Filing

If there are fewer papers coming into the house, there will be fewer decisions to make about what to keep, what to recycle and what to file. Try these tips:

"   Save your sanity while saving the world by signing up for greendimes.com. For $3.50/month they'll remove you from junk mailing lists, keep you off and plant a tree for each month you subscribe. Makes a great gift, too.

"   Sign up for online bill pay and statement delivery via your bank, creditor or brokerage Web sites.

"   Create a simple mail-opening station wherever you drop everything upon entering your home or office.