How to Categorize Tax Refunds

How do people categorize tax refunds? I have a taxes category as well as a “misc income” category. In taxes I include tax payments as well as tax prep costs. In misc income I put things like money received for items sold on eBay, federal stimulus payments, a bonus for signing up for a new bank account, etc.
I’m thinking tax refunds should go into misc income but would love to hear others’ thoughts. Go!

If I were to get a tax refund, I would put it into the Tax expense category. My thinking would be that it is an over payment rather than a net new income.

(I have an income category that I call Cash Back. It’s where I stick things like credit card rewards, the odd bits of income from here and there, federal stimulus payments, etc. But don’t think it would go there.)

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Personally, I would put them in the “Taxes” column. To me, these are credits against the overall taxes category.

I do the same with eBay. I have a “Technology” category. If I buy something new it is categorized as “Technology”. If I sell something on eBay, the credit is categorized as “Technology”. It just nets out as part of my total technology budget. Selling creates budget for new purchases.

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Makes perfect sense. However my taxes category only includes tax payments made when filing returns (only yearly for me, not quarterly). I do not enter withholding or FICA taxes taken out of my paycheck. I simply enter the net paycheck amount in my salary category. So for me, I got a federal refund for 2020, made a state payment and had no local payments. My fed refund is about 5x my state payment which would result in a net positive in my taxes category. In the long run likely doesn’t matter much but am just looking to hear what others do. Thanks.

I bet that like you, many people don’t bother itemizing withheld taxes. I don’t, as my paystub provides a running total with no effort from me.

Withholding, properly calculated, will avoid any underpayment penalty and, ideally, just meet or exceed tax liability. With this approach, a Taxes category is a quick way to gauge the net accuracy of your withholding for the prior year. All Federal or State payments or refunds should be close to net zero. Otherwise, an updated W-4 or state withholding form might be needed.

Since tax prep cost is no longer deductible, I’d add that to the Tax category also. Might as well withhold enough to get that expense refunded.

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I include any tax refunds as tax refund income. I use the splitter tool to break out all the deductions buried in the paycheck. My rationale is to capture all the detail as the transactions occur and get that detail into Tiller. In the future, I would rather have the detail and not need it rather than want it and not have it. This results in me having 10 times more categories than most people but that is fine with me.

In that case, I’d probably categorize it as income… because yes it’s an overpayment of tax but it’s also an underpayment of your paycheck. So income seems like an appropriate option too.

I usually put it in my “misc income” category because I use my tax withholding categories for budgeting quarterly estimated payments.

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Hi @james3332:

Because our budget is essentially a cash-flow plan, I categorize any refund or cash payment from the feds as “Income Tax Refund,” Type: Income. (The budget for these match the amounts received in the month they arrive.)

Then I can dispose of it in the budget via allocations among spending, savings, giving or investing…all expense-type categories.

If I make investments or savings transactions from these refunds, I categorize the deductions as expenses and the related deposits that appear later among the connected accounts as Transfers.

Glad you’re getting some of your hard-earned money back. As @susandennis and @aronos point out, a tax refund is really in indicator that you’re paying too much in taxes throughout the year. The best scenario is to owe just a little bit with your tax return. That way, you aren’t serving as the government’s banker, where your extra tax payments become a 0% loan to them for a year.

All the best.

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I make quarterly estimated tax payments. I always pay in more than needed as cushion for the unexpected. There is always unexpected. With today’s interest rates, your interest free loan to the government is not costing you that much.

Ha! Now you know how old I am…when I first heard that rule of thumb, interest rates in the US were double-digits. Guess I should read more newspapers… :grinning:

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I put refunds in the Federal Tax category since it is an offset to taxes. I backdate it to the end of the prior year since it really is part of the prior year total liability.

I do my best to keep my W-4 withholdings up to date and minimize the interest-free loan to the IRS, but it’s inevitable that some imbalance will occur. I have a Passive Income group for positive cash flow such as statement credits, private sales (FB Marketplace, Craigslist, etc), earned interest on savings accounts, and in this case tax refunds. Whatever comes in as a refund gets transferred as savings to other categories as needed, defaulting to my Emergency Fund and Discretionary Savings. My property tax exemption, which comes in the form of a check from NY state, also gets categorized this way. I don’t go as far as @Blake with splitting out paycheck deductions and balancing against those, but as my wife and I are looking more at trying to automate a 50/30/20 analysis (future project when I have the time), I can see the value in it, and I would need to do it for my pre-tax and after-tax deductions anyway.

Yes this is what I do as well. I only enter my net income in the budget and include any refund as additional income that was just deferred. As was mentioned interest rates are almost nothing these days and I try to not have to pay in my annual true-up with the government. If interest was high I would go opposite and try to pay a little annually instead.