Back in March, I sat down to file my family’s income taxes, both federal and state. Part of that process is taking a serious look at my expenditures throughout the year and figuring out which ones are actually tax deductible.
Now, I have a lot of expenses that are tax deductible. I have computer equipment solely devoted to work, as well as a bunch of research materials. We have a lot of other miscellaneous deductions, too, like child care costs, donations, and energy improvements.
The tax-deductible expenses really do add up over the course of a year, but they’re often spread across a hundred different documents. We’ll have receipts from one place, statements from another place, and even more material from yet another organization.
This could be a nightmare. But let’s add yet another twist.
All throughout the year, I’m pretty diligent when it comes to keeping track of my spending. I don’t strictly budget, per se, but I do want to know where my money is going — and if things aren’t adding up, I want to figure out what has gone wrong and where the money went.
For me, doing this takes some effort, but it also provides a lot of personal value. It enables me to really clearly see where all of my money is going, and that has incredible value for me, especially over time as I have more and more data.
The catch is that this takes real effort. I have to enter all of those expenses into a system that can collect and save and categorize it for me. That data entry process takes time, not just in the data entry, but making sure that everything that needs to go into the system actually makes it there. It’s something I’ve struggled with since I first became really aware of my finances in a real way.
The thing is, I actually solve both problems at the same time using a pretty simple system. It takes care of spending tracking while also taking care of making my deductions as easy as possible.
Here’s how it works, broken down into easy steps.
I Get a Receipt for Every Transaction (If Possible)
Whenever I spend money somewhere, I ask for a receipt and I stick it directly in my pocket. If I purchase something online, I print off a copy of the receipt.
It’s so simple. Still, it is sometimes possible to forget to ask for and save every receipt, so as a “double check,” I also run through my credit card and bank statements each month so that I am sure that I know what all of the transactions are.
When I Don’t Get a Receipt, I Directly Record It Somewhere Else
Occasionally, there are expenses that don’t produce a receipt. For example, I love shopping for fresh produce at farmers markets, and when I do that, I usually just take cash and pay the vendors directly with cash. They rarely if ever give a receipt.
In those cases, I write down that expense in my pocket notebook. When I get home, I’ll jot that expense down on another slip of paper and save it (see below).
This doesn’t happen too often, but it does pop up sometimes. You need a system to handle those non-receipt situations as well.
I Put All Receipts in a ‘Receipt Basket’
So, I have this pocket full of receipts. I have a few printouts from the computer, plus I have a few slips of paper from cash expenditures. What do I do with them?
To put it simply, I drop them all straight into a “receipt basket.” That receipt basket is on my bedside table and it contains all of my receipts (or some note about an expense) for my most recent expenditures.
I don’t do anything with them immediately. The basket is mostly just a way to “catch” all of those receipts for a while so that I know where they are and I don’t have to worry about them.
Every Week or Two, I Process All of Those Receipts
What do I mean by “process”?
First of all, I list all of my expenses in my preferred expense tracking program, You Need a Budget. This involves categorizing the expenses a bit so that I can easily summarize my spending, as well as recording the date and the amount (and the specific expense).
Sometimes, I’ve already recorded them, which is no big deal. I’ll often record expenses on my phone using the mobile app and when I do that, I’ll mark a big R on the receipt so that I know it’s already recorded.
I am a big fan of You Need a Budget. It works really well for my needs in terms of recording and evaluating my expenses and making sure that nothing unexpected is happening with my spending.
If It’s Tax Deductible – or I Suspect That It Is – I Save It With a Note
The second part of “processing” is that I evaluate each expense from the perspective of taxes. Is this something I can deduct from my taxes when I file them?
Most of the time, the answer is pretty obvious. I can deduct things like charitable expenses or research materials for my writing. I can’t deduct things like family dinner.
Sometimes, I’m not sure – and if I’m in doubt, I’ll still save it. I usually try to include a note with anything that isn’t clear so that I have some idea of why I saved it so that I can make sense of it later.
These receipts are saved in a clearly-marked manila envelope, simply labeled with the year and the word “DEDUCTIONS” in giant letters. I keep this in our filing cabinet and thus it’s really easy to find it when I need it during tax season or when I need to stick new receipts in there.
I should point out that this processing only takes 10 or 15 minutes. This isn’t a big, time-consuming thing.
The Key Is Trusting the System
This is really the key to all of this. I trust my system. I know that if I have receipts, they’re going into the basket. It’s routine. I know that when I go through the receipts, they’re all going to be there. It’s routine. I trust it.
Because I trust the system, I trust the results that come out of it. I trust the data that’s going into You Need a Budget, so when I look at the reports it generates, they’re actually meaningful for me. They’re an authentic summary of my spending.
Similarly, since I trust the items I’ve set aside for the purpose of tax deductions, I trust those receipts when I pull them out in February or March. I know that all of the materials I need for tax deductions are in that envelope, so I can sit down and immediately do my taxes.
Trust in your systems is absolutely vital for any kind of organizational system. You have to be able to trust what your system produces and to do that you have to be consistent in what you put into the system. None of this works if I’m not consistent in putting all of my receipts in that basket.
Of course, the effort of having a trusted system is only worth it if you’re getting worthwhile things out of the system. For me, the double result of having all of my possible tax deductions in one place and having all of my expenses recorded in software that makes it easy for me to evaluate my spending makes the effort of maintaining a trusted system worthwhile.
My “receipt cycle” is really helpful for both tracking expenses and for noting potential tax deductions. The expense tracking helps me figure out where my money is going and track down “spending leaks” and tax deductions… well, they directly put money back in my pocket.
It only takes 10 or 15 minutes every week or two to keep this system in place and I feel as though I get more than enough value out of this routine to make it well worth it. In fact, I think that either result alone is enough to make this entire process worth the effort, in terms of the value I get out of it.
Give it a shot. You can jump in any time you want to. Just start now, and commit to making the system one that you can trust. If you put value in having your deduction information in order as well as in tracking your expenses, this system will be well worth it for you.