For many people getting ready for tax time is full of stress, tension and anxiety. Most people have receipts, statements, stubs and other tax information scattered all over the house. I remember one year when we lived in a very small apartment, our tax statements arrived in the mail on the same day we were trying to clean up the guest bedroom in preparation for visitors. I hastily put the mail (including our tax statements) in a box of crafts and stuffed the box on the top shelf of the closet to keep the guest bedroom clean. Needless to say, it took many hours of searching and much frustration to locate the tax statements after our guests had departed.
Thank heaven we have gotten a lot more organized since then. The first thing that helped us was when we started to use a spending plan and budgeting software to manage it. This helps us keep track of where every penny is going while at the same time gathering information throughout the year for tax preparation. So when tax time arrives, we have everything we need in one place.
A spending plan means getting a receipt (or your version of a receipt) for every transaction. When we purchase at a store using cash, debit card or credit card, we always ask for a receipt. If we purchase online, we keep the receipt until the credit card bill or bank statement arrives. If we buy something with cash where there is no receipt (think girl scouts selling cookies in front of the grocery store) we write down what we spent on a notecard we carry or we snap a picture of the item with our phone.
We have one room upstairs which is our home office so we put the receipts on one of the steps and whoever goes upstairs next takes the receipts upstairs, where they are put into the “receipt basket.” The paper in the receipt basket sits there for a week or 10 days then gets recorded in our budgeting software as we have time (we use Quicken.)
Any good budgeting software will allow you to arrange expenditures into categories so you can track your spending in a way that is meaningful to you. There are also many credit card companies, financial advosors and banks that provide budgeting software to their clients. The important thing is to be sure the software you use will allow you to track ALL your spending. If you are using the bank software but you can only track spending from the accounts at your bank, you may be missing spending from other bank accounts, credit cards or cash.
A lot of people ask us for the appropriate categories to use when they track their spending. The answer is that the categories need to be broad enough so it is not a major nuisance to record spending while also being narrow enough to allow you to analyze where you spend. For example, if you have a pet you may want a category devoted to costs associated with your pet (food, supplies, grooming, veterinarians, boarding or pet sitting.) If you have children you may want to lump like things together (sports, school tuition, supplies, etc.) Or you may want a category for each child. The important thing is to make sure your categories work for you. A sample list of spending plan categories can be found on the Compass Catholic Website: Spending Plan Categories
If you are using an electronic budgeting program it’s pretty easy to mark a category that would be considered tax deductible. This way every receipt that is put into that category is marked as a tax deduction and the amount of the deductions for that category is automatically totaled. Our “Giving” category has subcategories for each charity we support: our parish, the diocese, plus each non-profit to which we contribute. As appropriate, you can set up categories for child care, medical expenses, sales tax, property tax, investment expenses, union dues, etc.
The key is finding a system and process that meets your needs then using it all the time. Our process works for us – it may not work for you. We know that receipts always go on the step, then into the basket, then into the software. It’s routine and we trust it. Similarly, since we trust the items we’ve set aside for the purpose of tax deductions, we also trust those receipts when we pull them out at tax time.
Trust in your process is absolutely vital for any kind of organizational system. It may take a few false starts to define a process that works for you. Just start now, and commit to making the system one that you can trust. Even if you missed the first two months of the 2016 tax year, you still have 10 months of expenses and deductions to go. If you put value in having your deduction information in order as well as in tracking your expenses, define a process that works for you and start now! It will be well worth the effort.
We may not like paying taxes, but we are directed by the Bible to do it:
Matthew 22:17-21 says, “Tell us, then, what is your opinion: Is it lawful to pay the census tax to Caesar or not?” Knowing their malice, Jesus said, ‘Why are you testing me, you hypocrites? Show me the coin that pays the census tax.’ Then they handed him the Roman coin. He said to them, ‘Whose image is this and whose inscription?’ They replied, ‘Caesar’s’. At that he said to them, ‘Then repay to Caesar what belongs to Caesar and to God what belongs to God.’”