The 3 Folder Tax System

As the saying goes, two things are certain in life: death and taxes.

Around tax time, it’s a toss up as to which of the two people dread more.

I used to rush around in early April, trying to collect documents in the hopes that I wouldn’t have to file an extension.

It stressed me out.

When I began working at start-up companies I was issued stock, and my taxes got way more complicated. Reporting stock ownership and income is fairly complicated when the stock is in a privately held company.

I decided that it was too risky not to get this whole tax thing down to a science. So I’ve developed a simple system that makes tax time a breeze for me – even with some fairly complicated reporting.

I have dubbed it the 3 Folder Tax System.

I share it here in the hopes that it will make tax time a little easier for you.

You’ll need to create 3 folders and 1 spreadsheet:

  • An email folder (or tag) in your inbox
  • A paper folder
  • A digital folder (preferably in Dropbox)
  • A Tax Workbook (Excel document)

You’ll also need to schedule an annual Tax Review, which is really just a session to collect and file all of your tax documents.

The email folder

Every year I create a new tag in my Gmail inbox for that tax year, labeled “Taxes 20XX”. Any time I get an email communication that has tax implications, say a receipt for a charitable contribution, I simply label it with that tag.

This keeps me from having to hunt through my emails at tax time trying to remember what confirmations I might have, somewhere in my archives.

The paper folder

Unfortunately, not all organizations make your documents with tax implications available to you online. Boo.

Therefore, I keep a simple manila folder for each tax year labeled “Taxes 20XX”. When I get a paper statement from a charity, or an end-of-year interest income statement from a bank, I simply drop it in to that manila folder.

The digital folder

I keep a folder in my Dropbox labeled “Taxes”. In that folder are sub-folders labeled for each year “Taxes 20XX”. These folders are the final repository for all of my tax documents.

Everything ends up here once I have completed my Tax Review.

Annual Tax Review (Total time: 1 hr)

I schedule a review, usually in mid February, before I send all of my documents to my tax advisor (who files my taxes electronically for me).

During this review, I do the following:

  • Collect all the email correspondences from my “Taxes 20XX” Gmail tag, save them as PDF and store them in my “Taxes 20XX” Dropbox folder.

  • Collect all online Tax Documents, save them as PDF and place them in my “Taxes 20XX” Dropbox folder:
    • Interest earnings from bank and investment accounts
    • Proof of contribution to retirement accounts

  • Scan any paper documents that can’t be found online and store them digitally in my “Taxes 20XX” Dropbox folder (This may require a trip to Kinkos).

I now have all of the necessary paperwork for my taxes and probably could stop there. But I also like to keep a high level view of the year in my Tax Workbook.

Tax Workbook

It’s a simple Excel document with a tab for each tax year.

In it, I record:

  • W2 Gross Income
  • Other Income (freelance or consulting work)
  • Interest earnings (a line item for each bank acct)
  • Retirement contributions
  • Charitable contributions (a line for each specific charity)
  • Notes section (anything to remember to ask my tax guy)

You can download a copy here: Tax Workbook

Keeping this notebook also serves as a double-check to make sure that I’ve gone to all the appropriate sources to collect my back up information.

One More Thing

After your taxes are filed be sure to get an electronic copy of your taxes and put it in the appropriate “Taxes 20XX” Dropbox folder.

Taxes made easy. Baby, Baby!

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4 thoughts on “The 3 Folder Tax System

  1. Having just gone through the annual tax review this week in preparation for a call with our accountant this hits very close to home. I like the practical style of the post. Reminds me of a past favorite of mine about getting things done on 28 and Change.

    I will oddly plug an app I rely on for scanning called Genius Scan. Maybe that’s lame to do but it’s like having a scanner in your pocket that lets you save straight to dropbox.

    Thanks dude.

  2. Great tips man. I’ve been doing similar things with my taxes.

    I need to get a scanner at home, I just hate paper lying around all over the place.