{This post is part of the Great Paper Challenge: From Piles to *almost* Paperless series.}

Taxes. You either love ‘em or hate ‘em.

Actually I’m not sure I have ever met anyone who loves taxes…but surely there’s someone out there!

Nevertheless, taxes must be filed and paid so the best way to make it as painless as possible is to keep tax documents organized.

3 Ways to Organize Tax Documents

Organizing tax documents can be a big hurdle when trying to keep paperwork under control. I know quite a few  people who just throw documents (often unopened) into their paper pile only to spend hours going through it when it’s time to file taxes. Much of that time can be recouped by spending a few minutes early each year doing some prep work.

1. 12 Tab Expanding File

If you decided earlier in this series that your documents were simple enough to use a 12 tab expanding file, you know that there are 12 tabs with 13 pockets. The first 12 tabs should be labeled by month and the pockets used to file your monthly bills, statements and receipts. Label the final pocket “taxes” and file year end statements, W-2′s, charitable donation receipts, and other tax documents as they come in.

Easy right?

There are a couple downfalls to this system that need to be kept in mind.

• You need more than one 12 tab expanding file. Since there’s overlap from the time a new year starts to the time you actually prepare and file taxes, you need at least one other expanding file (one for the current year and one for the previous year).
• You have to create a new file to store the tax documents once the previous years taxes are submitted. Unless you scan every document related to your taxes once they’re submitted, you’ll have to find a place to store everything for the next few years (or forever). If you want to stay ultra-organized, that means creating a new file or hanging file. If you are going to create a new folder anyway, you might as well use one of the next two methods to save a step…

2. One Master “Taxes” Folder for Each New Tax Year

The absolute easiest way to organize tax documents is to have one folder for each year (and if you’re following along with this series, make that a hanging folder). As you look in your file drawer, you should see several tax folders: Taxes-2012, Taxes-2011, Taxes-2010, etc.

As documents come in for last year, immediately file them in your “Taxes – 2011″ folder. You should definitely open each document as they are mailed to you because you just may find a discrepancy that needs to be resolved or realize there’s some action required on your part before submitting. But, even if you don’t open the mail, at least file the documents in the correct folder instead of throwing them in your paper pile. That way all your documents are in one place when you actually are ready to begin the tax prep process.

You may even begin receiving documents or tracking information for the current tax year before you submit taxes for last year, so create your “Taxes-2012″ file now.

If you don’t do anything else other than put any and every tax related document into this one folder, you’ll be able to easily sort your documents for your CPA. And in very little time too!

3. Categorical Tax Folders

Those of you with more complex taxes or for those who have a hard time remembering what exactly should be tracked for tax purposes may benefit from categorical tax folders.

Categorical tax folders can be categorized in whatever way works best for you. If you need help tracking mileage, education expenses, educator expenses, health care expenses, etc., then feel free to make a folder for each of those to jog your memory. If you have business expenses and need help tracking advertising, auto, contract worker, home office, legal, and other expenses, then keep a folder for each of those categories.

Yes, you could keep them all in one folder like mentioned above, but if you have extra space in your file drawers or need reminders, than this system is for you.

To find the best categories for you to track, I’d recommend looking though your previous tax returns to determine what would work best for you. If you use Freedom Filer like I do, then pay attention to the categories they offer…I think they thought of almost everything!

(Remember, we’ll work on going paperless later in the series, but for now we’re dealing with any hard documents you may accumulate throughout the year. Plus, I know many of you are fans of keeping a hard copy of tax documents and wouldn’t even think of keeping them electronically! Oh, and keep in mind that I’m not a tax expert so always consult a professional to determine what documents you should keep/file.)

Action Items for Today

1. Determine which tax filing system will work best for you.
2. Depending on the above answer, set up your second 12 tab expanding file, create your “Taxes-2012″ folder, or review previous tax returns to create categorical folders for this tax year.

Let’s hear from you…

How do you organize your tax documents?

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Related posts:

1. The Great Paper Purge: Monthly File Folders
2. The Great Paper Purge: From Piles to *almost* Paperless
3. The Great Paper Purge: The In-Basket

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