Smart tax planning requires maintaining accurate records on your income, expenses, and the deductions you take on your tax returns each year. It also requires safekeeping of items, such as records of stock purchases or HUD statements, that determine your capital gain or loss when you dispose of an asset.  The proverbial shoebox is a poor tool for file storage and security. As a first step in smart planning, get a safety deposit box at your local bank, or a fireproof safe for your home.

And then use it to get organized!

Here's a simple method. Create a folder for each of the last four tax years, then put your past four returns the separate folders. Then, within each of these folders, create sub-folders that follow the organization of the Federal 1040. At a minimum, have sub-folders with the following labels: Income, Adjustments, Itemized Deductions (if standard is not used), Credits, and Payments.

Using Tax Year 2006 as an example, below is a simple structure for storing your tax returns and supporting documents. Keep items in bold for at least four years. 

In the Income folder, store the following information:

• Wages reported on W-2s
• Interest and dividend income on 1099-DIV and 1099-INT
• Taxable refunds or unemployment compensation on 1099-G
• Alimony received?keep divorce or separation decree for as long as alimony is received
• Income from Schedule C, E, or F on 1099-MISC
• Capital gains or losses
  • 1099-B
  • Cost basis in stocks, including purchase date
  • 1098-S
  • Capital improvements to home, with receipts for materials/labor
  • HUD-1 statements?retain until property is sold or transferred to heirs
• IRA and pension distributions on 1099-R
• K-1 income from estates, trusts, partnerships, or S-corporations
• Social Security income (SSA-1099)
• Miscellaneous income from gambling (W-2G), hobby, or jury duty

In the Adjustments folder, store the following information:

• Penalty on early withdrawal of savings on 1099-INT
• Alimony paid?keep divorce or separation decree for as long as alimony is paid
• Student loan interest expenses on 1098-E
• Tuition and fees expenses on 1098-T

In the Itemized Deductions folder, store the following information:

• Medical and dental expenses
• Taxes paid on local revenue tax bills
• Interest paid
  • 1098 Mortgage Statement
  • Qualified mortgage insurance premiums on 1098 (new for 2007)
  • Investment interest statements (for example, Form 4952)
• Gifts to charity
  • Charitable donation amounts, with canceled checks
  • Receipts for non-cash contributions, noting ?good? as condition
• Casualty and theft losses
• Job expenses and certain miscellaneous expenses, like union dues, safety equipment, safety deposit box, and tax preparation fees
• Other miscellaneous deductions, including gambling losses?details should include witnesses, location, and type of wager

In the Credits folder, store the following information:

• Childcare expenses, with the caregiver's name, EIN or SSN, and the amount paid
• Education expenses on 1098-T
• Residential energy expenses with canceled checks or credit card receipts
• Retirement savings contributions on W-2 or IRA contribution receipts

In the Payments folder, store the following information:

• Withholding on W-2s and 1099s
• Canceled checks for any ES payments

In addition, if you are self-employed, you will need to maintain complete financial records over the life of your business. This task may be beyond the scope of your ability; if so, hire an accountant to set up and keep the books for you. The professional advice will be worth the cost of this service, since it is a deductible expense.

Don?t delay in replacing the faithful but inadequate shoebox with a thorough, safe system of document management. It is never too early to organize and save your valuable files. Prepare the filing structure now, and as bits of your 2007 tax information arrive, just store them in their appropriate folders. Not only will you save time when you begin to prepare your return, but you will also save money if you decide to seek the help and advice of a tax professional.