We are a few weeks into the new year. It’s a great time for fresh starts. I encourage my clients to begin the year by getting their financial papers in order.
I usually get groans as a response to this suggestion.
I have good news. Contrary to popular opinion, the job doesn’t have to be hard or boring. In fact, the task can be quite simple. Just think of how amazing it would feel to have everything you need at your fingertips to prepare your income tax returns this spring—well before Tax Day!
We use a Kindergarten approach.
Julie Morgenstern in her book, Organizing From the Inside Out, made the Kindergarten Model of Organization an industry standard.
- Assign activities into zones
- Focus on one activity at a time
- Store items near their point of use
- Make items easy to put away
- Label everything
I teach my clients to use a paper management system, which follows this kindergarten model. This three-part system consists of a set of permanent action files, a set of current year files, and a set of general reference files.
The separation of current year files from general reference files is what makes this system unique. This article will teach you what to put in your current year file box so that you will have all the information that you need to file your taxes.
If you are reading this you likely are in one of two situations.
- You have piles or boxes of documents that need sorting. You suspect that these piles contain important tax-related documents.
- You have an overstuffed filing cabinet and you have no idea what is in there. Looking for information in this cabinet is daunting.
Perhaps you can relate to this story.
My new client called because she was planning a remodel of her house and needed to empty four rooms. She wanted to de-clutter and organize the contents of the rooms during the process because she didn’t want to store things that she no longer needed.
We toured the space. I noticed several filing cabinets in one room and a smaller cabinet in a room that had belonged to her late mother. In that same room, a dresser was piled high with documents.
My client said that she was behind on the filing and was a bit overwhelmed by the paper.
I suggested that we set up a portable, current year file box during our first session. It would take care of her backlog and give the incoming paper a home. Taking care of household business would be easy as she went through the remodel.
We set the box up in a three-hour session. She was able to get all the important papers filed and she let go of the documents that she no longer needed.
We have worked on various projects since her remodeling project, including cleaning out her filing cabinets. Setting up her current year box is something that we do every January. She loves having those documents portable. When we reset her system, we move her previous year documents to a file drawer.
One of my clients prefers to set up a new box every year and store the past boxes on a shelf. She keeps seven boxes labeled by year on the shelf. It is generally recommended to keep your documents that support your personal income tax returns for seven years.
Let’s get started.
If you are beginning this project early in the year, I would suggest setting up two boxes. A box for last year and a box for this year.
Gather Your Supplies
- A portable file box
- Look for a box that is eight to ten inches deep
- The box should hold letter size hanging file folders.
- Letter size hanging file folders
- Third cut hanging file tabs
- Most stores stock hanging file folders with fifth cut file tabs. I suggest purchasing a package of third cut tabs because most of your labels will be too long for the smaller tabs. It’s important that the print be large enough to read.
- Choose one color
- Letter size third cut file folders
- Choose one color
- Choose a labeling method
- A great time saver is to buy labels designed for file folders from the office supply store. Create the labels using your computer and printer. The results are easy to read and all you need to do is change the year when generating labels for the next year.
- Hand-held label maker – this is a slower and more expensive option
Color can uplift your spirit
I suggest using a color combination for your files that makes you feel happy. One of my business clients has yellow hanging files with blue file folders. She finds that the combination of colors and printed labels make working with her files almost a joy.
I don’t recommend using assorted colors in your Current Year file Box. Choosing one solid color for your hanging files and another complementary color for your file folders is soothing to your eyes.
What should you put in your Current Year File Box?
The answer is as much as you need and no more. You determine how many categories you need.
- A person running a business from their home may need most of the items from the list below and perhaps a few more that are specific to the business.
- Individuals who itemize deductions on their Income Tax may need to make several files from the list.
- A person who is a w-2 employee and files a simple tax return will need only a few files from the list.
Consult your accountant if you are not sure of the documents that you need to keep for taxes.
Keeping certain documents can be a personal decision. I have clients who don’t need to keep a lot of documents for legal reasons but want to keep certain files because they tell a story of their past. That is a fine reason for keeping them. Consider keeping a snapshot of older years; keeping one or two months will tell the story and reduce the amount of paper that you are storing.
Use the categories listed below as a guide to set up your file box. Read through the list and decide which categories you need or want. Remember, consult with your accountant if you are not sure about what you need to keep for tax purposes.
Create tabbed hanging files for each category. Create file folders to subdivide the category when you want separation. Some of my clients want both a tabbed folder and a file folder for every category.
A List of Common Categories
Begin your label titles with the year.
- 20xx Bank or Credit Union Statements
- 20xx Investment Statements (create a tabbed folder for each firm. These files can get bulky.)
- 20xx Credit Card Statements
- 20xx Pay Stubs (one of my clients calls these Income Statements)
- 20xx Mortgage Statements
- 20xx Utility Statements (One folder can hold the statements for utility services like gas, electric, water, and trash service.)
- 20xx Cell Phone Statements
- 20xx Cable & Internet Statements
- 20xx Medical & Dental Receipts
- 20xx Pharmacy Receipts
- 20xx Health Insurance EOBs (Explanation of Benefits)
- 20xx Medicare Summary Statements
- 20xx Income Tax (This is a great folder to store charitable giving receipts and to collect 1099s, w-2s, and other tax-related documents.)
Use this system to organize your piles of papers so that everything that is tax related will be at your fingertips. After you pay your bills each month, file the receipts or statements into the appropriate category.
Do you already use a system like this? Let me know in the comments.
Do you have questions about setting up a Current Year File Box? Ask your questions in the comments.