Get Organized:
Preparing for 2006 Tax Season

We are not even out of the 2005 tax season, nor have we started cleaning our homes for Pesach, but it is time to get organized for the 2006 tax season before the work that needs to be done becomes overwhelming. It is possible that your taxes are simple enough that you don't need to get organized until the the 2006 tax season arrives, but if you "itemize" deductions, have a small business or work as a contractor, or have other sources of income from which tax is not being withheld, there is no time like the present to get organized.

I highly recommend organizing your personal system using Excel Spreadsheets and File Folders. Here are some ideas.

1. Itemized Deductions, Charitable Donations: Chances are, if you own a home, you itemize your deductions. When you itemize deductions you are eligible to deduct you charitable deductions.

• It is absolutely necessary to keep an ongoing records of your charitable deductions given throughout the year. Besides the nightmare that you will experience if you try to organize everything at the end of the year, it is inevitable that you will be inaccurate. Even if you only donate to organizations that send a year end statement, it is necessary to keep your own records. More times than not, I have discovered that the year end statements are inaccurate.
• I highly recommend giving with checks or credit cards over cash. Although a donor does not need proof for single donations under $250, if one is audited, it is best to be able to show that all deductions on the tax form are clearly supported by documentation.
• The most effective method that I have found for keep track of charitable donations is to keep an ongoing spreadsheet for the year where every donation given is recorded by date, organization, reference to donation (e.g. check number, credit card statement for month of, or cash), amount given and amount deductible if the donation is not fully deductible (e.g. Yeshiva banquet).
• Information in your spreadsheet should be supported by documents in your Charitable Donations File Folder. Attach an envelope to the back of your file folder to keep small documents like credit card receipts and cancelled checks. Use the folder to store letters of receipt for donations and year end statements. You can staple the corresponding check or credit card statement to the letter for even greater documentation.
• When you write a check to an organization, write "Tax Deductible," "Not Tax Deductible," or "Partially Deductible" in the Memo line. If something is only Partially Deductible, you will want to make sure to keep a tab on the letter of receipt since it will tell you how much is deductible. If something is not deductible, you don't want to record it.
• Remember that not all tzedakah is tax deductible. Giving directly to meshulachim, while certainly tzedakah, is only deductible you are writing your check through an organization like your local Va'ad.

2. Small Businesses and Contractors:

• If you have your own small business, or if you work as a contractor for someone else, you are responsible for your own taxes. You need to be paying "estimated" tax payments four times a year (unless you are overwithholding enough through another source of income). Therefore, you need to be keeping track of your revenues and expenses so you know what to pay. Estimated payments are due April 15 (Quarter 1: Jan 1-Mar 31), July 15 (Quarter 2: Apr 1-Jun 30), October 15 (Jul 1-Sept 30), and January 1 (Oct 1-Dec 31).
• You should be keeping track of your revenues and expenses either using an accounting program like Quickbooks or an Excel Spreadsheet. You will need to make sure and depreciate an assets your business owns properly, as capital assets are not a regular asset. In a folder, or set of folders, you will need to back up all transactions with original receipts and documents.
• One you know your net income for the quarter, you can easily calculate out your estimated taxes due. You can either go through the IRS's complicated form, or you can do a very simple calculation that you can keep track of easily in a spreadsheet. Simply, multiply your net income by 92.35% (the amount of income you pay tax on) and by 15.3% (the self-employment tax rate) and by XX%(you highest marginal rate). And, of course, don't forget to pay estimated taxes to your state of residence, also.

3. Other Sources of Income From Which Tax is not Withheld: These sources of income can include rental income, alimony, and investments, among other things. It is important to know what you are paid, if you need need to pay tax on that item, and how to organize your records.

• Rent: Rental income is taxable, however, the laws of rental income, especially the laws of depreciation, are far too complicated to review here. So, although rental income is a fairly common source of income for many (basement apartments, boarder students, etc), I don't plan to talk about organizing your records here.
• Alimony: Divorce agreements usually stipulate an amount to be paid from former husband to former wife. Usually, the husband deducts from his income the amounts paid and the wife pays taxes on the amount received. I highly recommend that each party keep a record of payments actually made and actually received, rather than just relying on the divorce agreement that may or may not be adhered to. Record amounts received in your spreadsheet and multiply by your marginal tax rate. This is the amount you should pay in estimated taxes each quarter. And, of course, don't neglect to pay your state of residence.
• Significant investments: If you have significant investments (e.g. stock trades) that earn high amount of income from these investments, you will need to keep track of these investments separate from statements you receive so that you know if and when you should be paying estimated taxes. You will also need to familiarize yourself with the different types of dividends and different capital gains tax rates so that you can keep detailed spreadsheets and make estimated payments when needed. And, of course, don't neglect to pay your state of residence.