Some questions about tracking personal finances

[Buddha Buck]

I am not an accountant, so any "accounting advice" I may seem to give below
should be taken as "this is how I would do it", and not necessarily an
indication that it is the right way to do it in your jurisdiction. My
jurisdiction (where I am not an accountant) is the US, and New York State
specifically. If you are elsewhere, your mileage probably does vary.

I will note that you are asking tax-related questions (in which case your
mileage will definitely vary in details), and I was trained as a
professional tax preparer -- 15 years ago. So I will give general thoughts
and suggestions that are better than completely unhinged, but are probably
a little out of date.

On Wed, Jan 4, 2017 at 11:35 AM replicon <replicon at gmail.com> wrote:

> Hi all,
>
> So, I've had such a good time setting up my biz stuff with gnucash that
> I've
> decided to use it starting this year to track all my money and where it
> goes.
>
> It's pretty easy to set it up for my personal tracking, but I want to do it
> 'correctly', such that in addition to that, if I choose to do my taxes with
> an accountant next year, rather than TurboTax, I can generate a bunch of
> reports, hand them over, and expect them to be correct.
>

You would have to ask your accountant what reports he wants, but the
easiest way to figure out what you need to track is to take a look at your
tax forms from last year and see what lines had stuff of interest. For tax
purposes, those are the very minimum. Since you are starting this this
year, you can even try to manually do your 2016 taxes for practice (even if
you rely on TurboTax to do your actual filing), and see how you want to do
it. Filling out the forms for both itemized and standard deductions will
give you an idea of what the tax authority is looking for.



> So, while going through my various stuff, I've come up with some relevant
> questions that I hope someone can answer. If this is not good form for this
> list, I'm happy to break these up into separate posts...
>
> 1) "Tax-Related" Accounts: It looks like you can set tax options (through
> some workflow other than that checkbox), but the manual doesn't really give
> that section a proper introduction. Is this something I should worry about,
> or something I can configure later without having to go back in and move
> everything around?
>

I'm not sure what the "tax-related" accounts checkbox does. I wouldn't be
too worried about it, as long as you can tell, later, when looking at
reports and balances, what needs to go where.

A "tax-related" account is usually an account that has some specific tax
treatment. For instance, I have a "Expense:Interest:Student Loan" account
which is tax-related because I can deduct (as an adjustment to income) the
student loan interest I paid last year. Similarly, if I had a mortgage, I
could have a "Expense:Interest:Mortgage" account that was similarly
tax-related. The account "Expense:Interest:Credit Card" would not be,
because there's no special tax treatment.

My experience as a volunteer tax preparer was that I was trained, for
*every* client, to go through each line of the "long form" and assess
whether or not that line applied to them. If you look at the long form the
same way, "does this line apply to me", and if so, ask "where should I
track this data", you will have a good idea of what tax-related accounts
you'll need.


> 2) If I look at my paystub, it's got a breakdown of where things are going.
> Some of them are pre-tax (e.g. 401k, benefits (dental/vision/medical)), and
> some are just taxes. Taxes are easy, just transfer to expense:Tax
> subaccounts, but is there any best practice for the pre-tax stuff? Is that
> just generic expenses?
>

Where it goes into your account tree depends on what you want to keep track
of. You might want to be specific and have both an "Income:Wages:PreTax"
and an "Income:Wages:Taxable" accounts to track your income more carefully
-- and to verify that the total income on your W2 forms (assuming US here)
matches your "Taxable" income.

Not all those are expenses. 401k is an asset that I'll admit I don't know
how to deal with, but it's not an expense.

Taxes withheld might be treated as an asset, like a prepaid expense, but
that's probably not worth doing. I treat it as an expense.

For pre-tax benefits, it is worth keeping them in a separate expense
account than related post-tax expenses. You might be able to deduct all or
part of the $10,000 hospital stay, but your health insurance premiums paid
"pre-tax" come "pre-deducted", so you can't deduct them again, for instance.

3) Itemization - so far, I've always gone with the default deduction, but
> for all I know, this might change. What are some best practices to help
> make
> that decision? I assume a "sales tax" account under Expense:Tax is one, but
> are there any others? I know very little about this stuff.
>

The best practice is to compute it both ways and take whichever is more
advantageous to you. This means looking over the instructions for
itemization and making accounts in your account tree that match the
deductible categories that are important to you, like mortgage interest,
out-of-pocket medical, state sales tax, property tax, charitable
deductions, etc.

The instructions that come with the tax form can tell you better than I
what the taxing authorities will allow for itemized deductions, so you can
simply read over those instructions and add them to your list of
tax-related accounts to use.

Since I don't do stock stuff myself, I'm skipping the next two questions,
but I'll eagerly read other's answers.

4) RSUs: I get restricted stock units on a vesting schedule, and part of
> them are always sold to account for income tax. How do you guys model this?
> Two transactions, one to receive the RSU (transfer: Income), and one to
> auto-sell the tax portion (transfer: Expense:Tax:Income:RSU or something)?
>

5) 401k: Any special considerations? I was thinking of doing something like
> this:
> https://lists.gnucash.org/pipermail/gnucash-user/2003-January/005402.html
> -
> fairly simple, though the transactions are just adjustments to the total,
> for calculating net worth. This kind of goes back to the "pre-tax" question
> as well.
>
> 6) Home: I paid off the condo I live in a while ago. I assume this is now
> just an asset with... whatever zillow tells me the place is worth? Or
> should
> it be "what I bought it for" (price + closing costs)?
>

I'd ask your accountant, but I'd use the "basis price" (what you paid,
closing costs, costs of capital improvements) as the opening balance on the
condo account. If you hadn't paid off the condo, I'd use the current
mortgage balance for the opening balance of the associated liability
account.


> 7) Charitable Donations 1: When I give to charities, and get a tax receipt,
> how should I model that? I get the sense that such "tax writeoff" type
> things just need to be "negative income", since that's my understanding of
> how it's done at tax time.
>

The standard chart of accounts has an "Expenses:Charity" account. Use it --
or subdivide it more if desired.

As far as "negative income" goes... Fundamentally, there are three things
to worry about in accounting, long-term: Assets (stuff you have),
Liabilities (how much you owe others) and Equity (how much you own
outright, aka "Net Worth"). The equation is "Assets = Liability + Equity".
Income and Expense accounts are a way to track and categorize changes to
equity. Income increases equity, expenses decrease equity. So there isn't a
lot of difference between a "negative income" account and an expense
account.


> 8) Charitable Donations 2: Does the above apply for the case where I give
> existing items (e.g. clothes), and I get a blank receipt on which to write
> what I think those clothes were worth?
>

The major difficulty here is that there probably isn't an existing
"Asset:Clothing" account to credit when making the donation. I'm not sure
how I'd track that, possibly as crediting "Income:Miscellaneous" for the
donation as well as debiting "Expenses:Charity".


> 9) Finding extra unaccounted-for cash: Let's say I find a $100 bill in my
> couch in a few months. Does that "Cash" transaction just balance against a
> new "opening balance"? I can't imagine it's "income", since it's already
> mine, so it's like... "an opening balance I wasn't aware of until now" :-)
>

Keep in mind that "Income" means "Increase in Equity" at this time, and
"Expense" means "Decrease in Equity". When you find unaccounted-for cash,
it's an increase in equity, so it's income. When you realize you've lost
cash, it's a decrease in equity, so it's an expense.

An "opening balance" is just an offset against equity anyway.

I would treat it as an "opening balance I wasn't aware of until now" if it
is reasonable to say that I did in fact have the $100 before the opening of
the books -- is it something that should have shown up on my balance sheet
in my opening balance?


> 10) Selling personal items: Same kind of question as above. If I hold a
> garage sale, and sell a bunch of things I own at a steep discount, is that
> considered "income"? I'd be more inclined to think of it similarly to
> "finding a $100 bill in my couch", since I'm just selling stuff I bought a
> long time ago at some un-calculable loss.
>

Everything in the yard sale is, in accounting terms, worthless, already
expensed away. So anything of value that you get for them is pure income.

Let's take an example: Five years ago you bought a PS3 for $300, and
charged it against "Expenses:Electronics". It wasn't an asset on your
books, and as far as your books are concerned it has zero value. This year,
you sell it at a yard sale for $25. That $25 is income, and is most likely
taxable income as well.

As a counter example, let's say that 3 years ago you bought a car for $10k,
and expected it to last 5 years. Since it holds considerable value over
time, you depreciated it at a rate of $2k/year (this is a simple
depreciation example, how to depreciate a car is something I'd have to look
up), so you'd transfer $2k per year from Asset:Car to
Expense:Car:Depreciation. Now when you sell it for $5k, you'd treat $1k of
that as income, and $4k as coming from the present value of the car.

But for a yard sale, if the item you are selling isn't on your books, it's
income.