Last gasp, I swear! Estimated taxes as assets (discussed ad nauseam)

Don't feel bad, Al. I have to have this explained repeatedly. I almost understand it, but not nearly as well as RC, who will hopefully give us our yearly tutorial.

jo

I’m not RC, but I’ll give this a try…

At the heart of this issue, at least for me, is the fact that my income that is tied to a calendar year but the tax bill isn’t settled until sometime between Jan 1 & Oct 15 of the following year.

When I run a report for a year, I want to see how much I made between Jan 1 and Dec 31 along with the taxes that were due on that income. I’d prefer to keep it all in Quicken so that I can run a Yearly report & see it all in one screen, without fiddling with the criteria or running separate reports.

Quicken won’t let me send money to the IRS with a transaction that’s dated on April 15 and still show that transaction with a date = Dec.

Great, so what does that mean?

We probably don’t want to introduce bogus transactions into accounts that will need to reconcile against statements. i.e. we don’t want to stuff a bogus transaction into our bank account, dated Dec. 31 to adjust to the correct tax amount. However, if a transaction amount is $-0-, meaning any splits balance to $-0-, it won’t throw your balance out & can be included in your reconciliation activity without much impact.

So, RC’s method is to set up an asset account (call it [Estimated Taxes]). It’s not an actual account at a bank, it’s just an account within your Quicken file, kind of like a Savings Goal. When you send payments to the IRS, make the payee “IRS”, but make the category = [Estimated Taxes]. That will transfer money out of your bank account (so you can reconcile against your bank statement) to the [Estimated Taxes] account. Do that for each of your quarterly payments, even the one that occurs Jan 15 of the following year.

Then, after you’ve filed your return & you know what your actual numbers are, we’ve got three potential paths and one adjustment transaction.

Now for the adjustment transaction.

In the accounts that you’ve sent your quarterly payments from, you’ll see each payment & you’ve probably already reconciled those against your bank statements. We don’t want to mess with those. However, those transactions put money into your [Estimated Taxes] account. You’ve now got an account that shows a balance you don’t really have & the money in that account now needs to be changed to an Income Tax category.

To straighten that out, create a transaction in the account you sent the payments from (the one you reconcile), dated Dec. 31 of the tax year you’re working on. The transaction amount should be $-0-. Enter the -0- in the Payment column.

Once you’ve entered $-0- in the Payment column, open the “split” window, then enter the amount of taxes that you actually paid (from your tax return) with whatever category name you use for Income Tax. Quicken should automatically create another split line that is the exact same amount in the opposite direction right below it. Assign the category on that new split line to be [Estimated Taxes] and save the transaction.

That transaction will now book Income Taxes in the same year as the income & draw a balance out of the [Estimated Taxes] account so that the transaction balances to $-0-.

It’s OK if the [Estimated Taxes] account shows a balance (either positive or negative) as of Dec. 31, because you’ll never have to reconcile it against a statement.

Now that the prior year is done, you create your 2nd quarterly payment for the following year at the full amount, with the category = [Estimated Taxes] & repeat the whole process.

AHA!

1. The advantage lies in reporting needs of user.
2. The methodology is now crystal clear, due to Bartt's well outlined message and prolonged study & digestion of RC's patient explanations.

Thank's to Bartt and Jo, and to RC over the years.

On a personal note, I see repeatedly that RC claims to have been retired for 20 years. Hope he won the lottery and retired very, VERY early, because he and John and others are the jewels of this forum and should stay around forever. Just a personal opinion, mind you...

I'll certainly want to be the first to second that!

Hi, Al.

Thanks for the kind words. ;

AHA!

1. The advantage lies in reporting needs of user.
2. The methodology is now crystal clear, due to Bartt's well outlined message and prolonged study & digestion of RC's patient explanations.

Thank's to Bartt and Jo, and to RC over the years.

On a personal note, I see repeatedly that RC claims to have been retired for

Great explanation, Bartt. If I actually print it out, study it, and follow it step by step, maybe this year I'll actually understand it and do it correctly! I think it was the 0 sum transaction that got me.

jo

Last, LAST gasp... Very interesting, RC. Hope you mean Thomas Stanley's book and not Kara Lennox' American Harlequin Romance #990 of the same title. (Kidding!) Having adopted e-readers some time ago, I'm debating getting Stanley's "Summary: The Millionaire Next Door" in e-form, or trudging over to the library for the real McCoy. Well, I have to renew my library card anyway, so that will be my chance. By the way, I am taking the liberty of quoting everywhere your take on getting rich.