Accounting for tax refund in budget

[mattbaxx]

Wondering what others do in this situation: I project DW and I will receive $2-3K back on our federal taxes this year and for the next couple of years at least. We pay monthly tax on a SEPP and teacher pension.

Part of me says to just throw the refund into the checking account as income, and a slightly more mischievous side says to put it in the budget as an offset to taxes paid, thereby reducing our tax expense for 2019 and increasing available space in the budget for fun things like RV travel and disc golf. And beer. And tacos. And...

I realize this is mostly mental gymnastics as it doesn't truly affect how we'll spend next year, I am just tired of arguing with myself. DW couldn't care less.

How do you/would you handle this?

 

[Walt34]

I change withholding until I get a close as I can to writing a small check to both federal and state, one that does not incur underpayment penalties.

 

[mickeyd]

Reducing your W/H until you owe Uncle Sam a bit of money in April may be your best bet.

 

[RetireAge50]

I would quit the accounting job and drink beer and eat tacos.

 

[Cobra9777]

I don't really have a budget. But I do track actual spending and make projections. Everything is on a purely cash basis. So in the case of your question, a refund in 2019 due to over-withholding in 2018 would be treated as a reduction of 2019 federal taxes paid. If the refund is about the same every year, then your calendar-year expense tracking will be unaffected by the cashflow timing.

In practice, I do the same as Walt34. I don't have any withholding. But I make estimated quarterly payments that are carefully calculated to leave a small payment due each April, but safely clear of any under-withholding penalties.

 

[IMATERP]

I would take the 2k - 3k and treat it as misc income. Use the cash to have a bit of fun.

I would then withhold $250 less per month in taxes during the year and match your taxes payable with your estimated income. No reason to overpay the taxman until it's time.

Since you have already overpaid the taxman for 2018, it really should be treated on your books as an overpayment.

I

 

[jazz4cash]

I change withholding until I get a close as I can to writing a small check to both federal and state, one that does not incur underpayment penalties.

This. I don’t mind paying my fair share but I hate floating Uncle Sam an interest free loan.

 

[scrabbler1]

I never had a federal income tax refund that large. The one time I was on the verge of getting a big refund, my first year of working, I figured out in advance how much it was going to be (this was in 1985, before the internet ad tax calculators; only paper and pencil and an ordinary calculator I had) and upped my withholding exemptions to 12. It worked perfectly, as my April tax returns had me either owing or getting less than $100. Meanwhile, the extra $1,600 in my paychecks for the last 6 months of 1985 helped me pay cash for a car in early 1986.


As for accounting for April payments or refunds in my own ledgers, I usually use a cash basis. But I have made some exceptions for very large amounts which could distort my ledgers. Back in 2008-09, I took my big company stock payout and paid some of the income taxes via estimated payments in late 2008 and early 2009. But the remaining big payment I made in April of 2009 would have more than exceeded my entire income in 2009, my first year of ER. So, I netted it out against the large 2008 income on which it was taxed.

 

[aja8888]

I never had a federal income tax refund that large. The one time I was on the verge of getting a big refund, my first year of working, I figured out in advance how much it was going to be (this was in 1985, before the internet ad tax calculators; only paper and pencil and an ordinary calculator I had) and upped my withholding exemptions to 12. It worked perfectly, as my April tax returns had me either owing or getting less than $100. Meanwhile, the extra $1,600 in my paychecks for the last 6 months of 1985 helped me pay cash for a car in early 1986.


As for accounting for April payments or refunds in my own ledgers, I usually use a cash basis. But I have made some exceptions for very large amounts which could distort my ledgers. Back in 2008-09, I took my big company stock payout and paid some of the income taxes via estimated payments in late 2008 and early 2009. But the remaining big payment I made in April of 2009 would have more than exceeded my entire income in 2009, my first year of ER. So, I netted it out against the large 2008 income on which it was taxed.

You must have an amazing memory to recall these details going back over 30 years. ( I don't doubt you, I am just amazed)

 

[audreyh1]

Wondering what others do in this situation: I project DW and I will receive $2-3K back on our federal taxes this year and for the next couple of years at least. We pay monthly tax on a SEPP and teacher pension.

Part of me says to just throw the refund into the checking account as income, and a slightly more mischievous side says to put it in the budget as an offset to taxes paid, thereby reducing our tax expense for 2019 and increasing available space in the budget for fun things like RV travel and disc golf. And beer. And tacos. And...

I realize this is mostly mental gymnastics as it doesn't truly affect how we'll spend next year, I am just tired of arguing with myself. DW couldn't care less.

How do you/would you handle this?

It’s not income. It’s lowered expenses.

Sure, you can use it to offset 2019 taxes if you want, but you’ve probably already budgeted for that.

So, you have some extra money left over from planned expenses. You can do whatever you want with it.

Hint: it really doesn’t matter whether you spend it this year or next year.

 

[socca]

How do you/would you handle this?

My 1040 has a single line indicating my tax liability. Looking at this over several years and then adding some padding provides a method of budgeting for this expense. The fact that in any given year I might overpay estimated taxes and then receive a refund is irrelevant to the budgeting process - my tax liability is what it is. Just my 2¢.

 

[mattbaxx]

Many good points. We never have a refund that large but the taxes we have been paying are baked into the SEPP, and we have been lucky enough to not have to worry about maintaining income this year so our tax bill be unusually low. Problem goes away in three years and then I'll be back to planning better, always owing a little in April. That's the way I've played it for many years.

Appreciate all the ideas. It will indeed go against expenses and that will be that!

 

[scrabbler1]

You must have an amazing memory to recall these details going back over 30 years. ( I don't doubt you, I am just amazed)

I have told the story many times over the years, both here and in Bogleheads (and to actual people I know), so each time refreshes and reinforces my memory.

 

[Dtail]

I net it down against taxes paid. Yes, there are some of us who think about these things.

 

[scrabbler1]

I receive 2, sometimes 3 property tax rebates in a year. One of them is applied to my co-op's monthly maintenance payment in the year after my managing agent receives the rebate. So, I end up going back and adjusting my property taxes paid for year-1 the following January when I receive my first maintenance bill which includes 1/12 of the year's credit.

 

[Bir48die]

I've been all over the board in the last ten years due to either being a high earner and AMT kick in or now doing some adjusting to not get so much back. However, each year there are significant capital gains and I need to have some additional withholding to cover that. This year should be interesting with the new tax laws and the limit of $10k state and local taxes.

So, refunds have gone either to capital project and most recently additional travel money

 

[audreyh1]

I've been all over the board in the last ten years due to either being a high earner and AMT kick in or now doing some adjusting to not get so much back. However, each year there are significant capital gains and I need to have some additional withholding to cover that. This year should be interesting with the new tax laws and the limit of $10k state and local taxes.

So, refunds have gone either to capital project and most recently additional travel money

AMT thresholds have risen so high that far fewer folks will being paying AMT for 2018. We are finally out of AMT range.

 

[Texas Proud]

It’s not income. It’s lowered expenses.

Sure, you can use it to offset 2019 taxes if you want, but you’ve probably already budgeted for that.

So, you have some extra money left over from planned expenses. You can do whatever you want with it.

Hint: it really doesn’t matter whether you spend it this year or next year.

+1 on this... it is an expense line and if you get a refund it reduces that expense...



If you use a coupon do you claim the coupon amount as income and book the full amount as expense? I think not...


What about the CC cash backs? Reduction of expenses... yes for me...


BTW, I do not account for income at all... I just keep track of how much I am spending....

 

[mattbaxx]

If you use a coupon do you claim the coupon amount as income and book the full amount as expense? I think not...

Haven't quoted before. Hope I did it correctly.

I've had an internal monologue on this topic as well. Example: I get a $100 gift card and buy something I may or may not have purchased without the gift card. In the past I have included the gift card as income and the full expense of the purchase before the gift card. I tell DW that otherwise we are not truthfully reporting what our "expenses" are in any given year.

Again, the dollar amounts are not substantial, but planning a 50-year retirement makes me cautious about taking too much for granted.

 

[RunningBum]

I don't budget to that level at all, so I don't know which way is right. It just strikes me as wrong to say that if you account for it one way you can splurge, the other way you can't. If you want to splurge and can afford to do it, go ahead, but don't use this as an excuse, IMO. But it's your money, do what you want.

 

[Texas Proud]

Haven't quoted before. Hope I did it correctly.

I've had an internal monologue on this topic as well. Example: I get a $100 gift card and buy something I may or may not have purchased without the gift card. In the past I have included the gift card as income and the full expense of the purchase before the gift card. I tell DW that otherwise we are not truthfully reporting what our "expenses" are in any given year.

Again, the dollar amounts are not substantial, but planning a 50-year retirement makes me cautious about taking too much for granted.

Hmmm, that is interesting... now that I think about it I am doing it both ways...


If I get a cash back credit on my CC I put it as a negative expense... but if I have them send me a gift card for something that I want and use that gift card I just ignore it...


Same with cash... we get cash back (real dollars) from Sam's club of $400 to $600 each year... I just put the cash in a drawer at home and we spend that money over time... it is not a reduction of expenses... if I deposited that money I do not reduce expenses.... now, if I then take it back out I count that cash as an expense...


Really bad accounting and I am a CPA!!


BTW, I am not going to change... another rule of accounting is that if you were accounting for something wrong you are supposed to keep doing it the same (wrong) way unless you restate history... yea, like I am going to do that..

 

[audreyh1]

Haven't quoted before. Hope I did it correctly.

I've had an internal monologue on this topic as well. Example: I get a $100 gift card and buy something I may or may not have purchased without the gift card. In the past I have included the gift card as income and the full expense of the purchase before the gift card. I tell DW that otherwise we are not truthfully reporting what our "expenses" are in any given year.

Again, the dollar amounts are not substantial, but planning a 50-year retirement makes me cautious about taking too much for granted.

I don't track gifts to me as income.

Credit card rebates, cash rewards, membership rebates, etc. I do track. These are taken off expenses - i.e. as a credit against total annual expenses.

A specific example - I got a Costco $20 cash card as a reward/rebate for a car rental I made a few months ago. When I used it, I entered it as a credit against the travel:car rental category since it obviously lowered the cost of that particular car rental.

If we sell something (like used computers, camera equipment, etc.), I take the amount as a credit against spending in the same category. We are selling something we previously bought for a higher price, so I don't consider that income, and neither does the IRS.

 

[gstillson]

Due to some luck and trading, I have to write a check for about $50k to the IRS before April, so I definitely have to budget for that. Actually I have mentally set aside that $50k and am not putting it at risk, since it is really their money now.

 

[mattbaxx]

Credit card rebates, cash rewards, membership rebates, etc. I do track. These are taken off expenses - i.e. as a credit against total annual expenses.

Oh boy, I hadn't even considered the credit card rebate! Now I have even more to adjust...

 

[mattbaxx]

Really bad accounting and I am a CPA!!

Don't feel bad. I am a really bad kindergarten teacher! Appreciate the insight. Glad to know that thinking these things and doing them how I choose is better than not thinking about them at all...