Accounting question re tax refund

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Accounting question re tax refund

Bob Williams
I overpaid my income tax and HM Revenue and Customs has kindly sent me a
cheque. Would you advise me to record this as a negative value in
Expenses:Income Tax or income in Income:Other Income?

The money isn't actually income, I just accidentally "lent" it to the
taxman ;). Likewise, it's not tax either, as I should never have sent to
said taxman in the first place.

I realise that this is an arbitrary decision, but I'd be interested in
hearing what others have done in this situation.
--
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Re: Accounting question re tax refund

Adam Funk-4
On 2008-05-19, Bob Williams wrote:

> I overpaid my income tax and HM Revenue and Customs has kindly sent me a
> cheque. Would you advise me to record this as a negative value in
> Expenses:Income Tax or income in Income:Other Income?
>
> The money isn't actually income, I just accidentally "lent" it to the
> taxman ;). Likewise, it's not tax either, as I should never have sent to
> said taxman in the first place.
>
> I realise that this is an arbitrary decision, but I'd be interested in
> hearing what others have done in this situation.

I think it should be a negative value in Expenses:Income Tax.

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Re: Accounting question re tax refund

Andrew Greig
In reply to this post by Bob Williams
On Mon, 2008-05-19 at 13:26 +0100, Bob Williams wrote:

> I overpaid my income tax and HM Revenue and Customs has kindly sent me a
> cheque. Would you advise me to record this as a negative value in
> Expenses:Income Tax or income in Income:Other Income?
>
> The money isn't actually income, I just accidentally "lent" it to the
> taxman ;). Likewise, it's not tax either, as I should never have sent to
> said taxman in the first place.
>
> I realise that this is an arbitrary decision, but I'd be interested in
> hearing what others have done in this situation.

Head of to Asot and try for some growth ;-)

Andrew
(sorry)

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Re: Accounting question re tax refund

Tarlika Elisabeth Schmitz-3
In reply to this post by Bob Williams
On Mon, 19 May 2008 13:26:34 +0100
Bob Williams <[hidden email]> wrote:

> I overpaid my income tax and HM Revenue and Customs has kindly sent
> me a cheque. Would you advise me to record this as a negative value
> in Expenses:Income Tax or income in Income:Other Income?
>
> The money isn't actually income, I just accidentally "lent" it to the
> taxman ;). Likewise, it's not tax either, as I should never have sent
> to said taxman in the first place.


Hello Bob,
There was a similar discussion about how to record tax liabilities here:
http://www.nabble.com/report:-aggregate-interest-per-account-td16881069.html


You seem to record the tax paid on account as expense. However, it is
not an expense at that point, just a reduction of a potential liability
towards HMRC. I say potential because it might be an overpayment. Only
the tax due, based on your Self Assessment, is an expense, which
needs to be recorded in the period that it relates to so it shows on
that period's P&L.

You need to record your ongoing payments into a liability account
(Liabilities:Tax). Everytime you make a payment you reduce
your liability towards HMRC. Therefore, tax on savings deducted at
source should also be put against this liability account.

The outcome of your Self Assessment tax return then determines the
tax DUE. This is the expense that needs to be entered against the
liability account. The date of this expense needs to fall within the
year it relates to. (I record it on the last date of the tax
year 05/04/XXXX).

Any payment to you by HMRC goes against the liability account
(Liabilities:Tax <-> Assets:Bank:Account) thus increasing your
liability.

The tax liability would go to zero when you are fully up-to-date and
have paid all the tax you have incurred to that point in time. In
practice, that will never happen as you continue to pay on account for
the current year.

--


Best Regards,

Tarlika Elisabeth Schmitz


A: Because it breaks the logical sequence of discussion
Q: Why is top posting bad?
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Re: Accounting question re tax refund

Maf. King
In reply to this post by Bob Williams
On Monday 19 May 2008, Bob Williams wrote:

> I overpaid my income tax and HM Revenue and Customs has kindly sent me a
> cheque. Would you advise me to record this as a negative value in
> Expenses:Income Tax or income in Income:Other Income?
>
> The money isn't actually income, I just accidentally "lent" it to the
> taxman ;). Likewise, it's not tax either, as I should never have sent to
> said taxman in the first place.
>
> I realise that this is an arbitrary decision, but I'd be interested in
> hearing what others have done in this situation.

Hi Bob,

IANAA, but I would record this as a negative expense!

HTH,
Maf.
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Re: Accounting question re tax refund

Gabriel A. Fouasnon
In reply to this post by Bob Williams
On Monday 19 May 2008, Bob Williams wrote:

> I overpaid my income tax and HM Revenue and Customs has kindly sent me a
> cheque. Would you advise me to record this as a negative value in
> Expenses:Income Tax or income in Income:Other Income?
>
> The money isn't actually income, I just accidentally "lent" it to the
> taxman ;). Likewise, it's not tax either, as I should never have sent to
> said taxman in the first place.
>
> I realise that this is an arbitrary decision, but I'd be interested in
> hearing what others have done in this situation.


There's a really good discussion of this issue at:
http://wiki.gnucash.org/wiki/FAQ#Q:_How_do_I_record_my_income_tax_installments_and_year-end_payment.2Frefund.3F
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Re: Accounting question re tax refund

Bob Williams
In reply to this post by Adam Funk-4
On Monday 19 May 2008 14:13:57 Adam Funk wrote:

> On 2008-05-19, Bob Williams wrote:
> > I overpaid my income tax and HM Revenue and Customs has kindly sent
> > me a cheque. Would you advise me to record this as a negative value
> > in Expenses:Income Tax or income in Income:Other Income?
> >
> > The money isn't actually income, I just accidentally "lent" it to the
> > taxman ;). Likewise, it's not tax either, as I should never have sent
> > to said taxman in the first place.
> >
> > I realise that this is an arbitrary decision, but I'd be interested
> > in hearing what others have done in this situation.
>
> I think it should be a negative value in Expenses:Income Tax.
>
Many thanks to all who answered, both on-list and by private e-mail. Some
of the replies made me feel quite dizzy, so I think I'll keep it simple
for the moment, and record it as a negative expense. At least until I've
got a better understanding of accounting principles. And as I'm retiring
soon, my affairs should get less complicated :)

Could I make a request that replies are always posted to the list? First
of all, that's where I expect to find them, secondly, there may be others
who would benefit from the replies. I wonder how many off-list
discussions are going on, that I could usefully benefit from as a lurker.

My 2p worth.

Bob
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Re: Accounting question re tax refund

Michael DeBusk-3
Bob Williams wrote:

> Could I make a request that replies are always posted to the list?

I was one who replied privately. I'm still not used to the way this list
is set up for response; it was inadvertent. Here's my response:

Your tax refund is definitely not income, and if it were, it would be
LAST YEAR'S income. If you like to close your books at the end of the
year, this matters.

I have an asset account, "Assets:Taxes Overpaid", and a liabilities
account, "Liabilities:Taxes Owed". As soon as I completed my tax returns
for last year, I debited "Assets:Taxes Overpaid" and credited
"Expenses:Taxes:Federal", dating the transaction 2007-12-31. Then I
could close out 2007. When I received my refund, I credited
"Assets:Taxes Overpaid" and debited my checking account.

These are the only times I use the accrual model.

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Re: Accounting question re tax refund

Roland Roberts
Michael DeBusk wrote:
> Your tax refund is definitely not income, and if it were, it would be
> LAST YEAR'S income. If you like to close your books at the end of the
> year, this matters.
>  
Hmm, since the original poster was not from the USA, I'm not sure if how
it works here is relevant.  But...

I received a refund from the State of New York in 2007 for the 2006 tax
year.  On my 2007 tax forms, I had to enter that refund.  It has a
special place on the form, but it effectively gets counted as income for
2007.  The reason for this is that it was not counted in 2006 (they
don't tax you on taxes).

roland

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Re: Accounting question re tax refund

Mike Alexander
--On May 20, 2008 9:58:39 AM -0400 Roland Roberts
<[hidden email]> wrote:

> I received a refund from the State of New York in 2007 for the 2006
> tax  year.  On my 2007 tax forms, I had to enter that refund.  It has
> a  special place on the form, but it effectively gets counted as
> income for  2007.  The reason for this is that it was not counted in
> 2006 (they  don't tax you on taxes).

I think the reason that state (not federal) tax refunds are taxed on
your federal income tax return is that the state taxes you paid in 2006
were deducted on your 2006 federal tax return.  You deducted what you
paid in 2006, then the state gave you some of it back.  That meant you
deducted more than you should have and you have to "undeduct" the part
that was refunded.  If you can show that the state tax deduction in
20006 didn't affect your federal income tax (for example because you
took the standard deduction) the state refund isn't taxed in 2007.
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Re: Accounting question re tax refund

Michael DeBusk-3
In reply to this post by Roland Roberts
Roland Roberts wrote:

> Hmm, since the original poster was not from the USA, I'm not sure if
> how it works here is relevant.

Ouch. I hadn't realized that.

> I received a refund from the State of New York in 2007 for the 2006
> tax year.  On my 2007 tax forms, I had to enter that refund.  It has
> a special place on the form, but it effectively gets counted as
> income for 2007.  The reason for this is that it was not counted in
> 2006 (they don't tax you on taxes).

The last time I got a state refund, it was for one dollar. I aspire to
someday break precisely even. :) I can't say I've ever noticed that line
on the forms.

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Re: Accounting question re tax refund

Jason Ahrens
Michael DeBusk said the following on 20/05/2008 10:22 PM:
> The last time I got a state refund, it was for one dollar. I aspire to
> someday break precisely even. :) I can't say I've ever noticed that line
> on the forms.
>  

It's actually really interesting that such a line exists. A tax refund
is a refund you get on the years taxes because you overpaid. That you
then have to claim that refund the next year as income is very
underhanded. Basically the state is clawing back money that should
already be free and clear because it was from a previous years books.

Jason
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Re: Accounting question re tax refund

Jason Ahrens
In reply to this post by Michael DeBusk-3
Michael DeBusk said the following on 20/05/2008 10:22 PM:
> The last time I got a state refund, it was for one dollar. I aspire to
> someday break precisely even. :) I can't say I've ever noticed that line
> on the forms.
>  

It's actually really interesting that such a line exists. A tax refund
is a refund you get on the years taxes because you overpaid. That you
then have to claim that refund the next year as income is very
underhanded. Basically the state is clawing back money that should
already be free and clear because it was from a previous years books.

Jason
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Re: Accounting question re tax refund

Roland Roberts
Jason Ahrens wrote:
> It's actually really interesting that such a line exists. A tax refund
> is a refund you get on the years taxes because you overpaid. That you
> then have to claim that refund the next year as income is very
> underhanded. Basically the state is clawing back money that should
> already be free and clear because it was from a previous years books
As Mike Alexander pointed out, it's not free and clear.  It was
deductible in the original tax year so it did not count then as taxable
income.  If they allowed it to not be declared in subsequent years, I
would arrange for larger overpayments 8-)

roland

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Re: Accounting question re tax refund

Ronal B Morse
In reply to this post by Jason Ahrens
On Thursday 22 May 2008 13:44:38 Jason Ahrens wrote:

> Michael DeBusk said the following on 20/05/2008 10:22 PM:
> > The last time I got a state refund, it was for one
> > dollar. I aspire to someday break precisely even. :) I
> > can't say I've ever noticed that line on the forms.
>
> It's actually really interesting that such a line exists.
> A tax refund is a refund you get on the years taxes
> because you overpaid. That you then have to claim that
> refund the next year as income is very underhanded.
> Basically the state is clawing back money that should
> already be free and clear because it was from a previous
> years books.
>
> Jason

It's not really underhanded at all. You get to deduct the
amount of the income tax you paid to the state when you
determine your federal tax liability. If your state or
local tax liability is less than the amount that was either
witheld or prepaid, hence the refund, it means the basis of
your taxable federal income should have been that much
higher.  

It's a matter of convenience that the state refund is
considered income in the year it was received, so you don't
have to go back and rejigger the books or file amended tax
returns for the year the tax payment was originally made.

Ron Morse
 
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Re: Accounting question re tax refund

Jason Ahrens
I guess I understand now some... I come from a country where the two
levels are somewhat tighter integrated taxwise so it just seems to work
much more smoothly.

Ronal B Morse said the following on 22/05/2008 2:33 PM:

> It's not really underhanded at all. You get to deduct the
> amount of the income tax you paid to the state when you
> determine your federal tax liability. If your state or
> local tax liability is less than the amount that was either
> witheld or prepaid, hence the refund, it means the basis of
> your taxable federal income should have been that much
> higher.  
>
> It's a matter of convenience that the state refund is
> considered income in the year it was received, so you don't
> have to go back and rejigger the books or file amended tax
> returns for the year the tax payment was originally made.
>
> Ron Morse
>  

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Re: Accounting question re tax refund

Doug Laidlaw
In reply to this post by Bob Williams
On Monday 19 May 2008 10:26:34 pm Bob Williams wrote:

> I overpaid my income tax and HM Revenue and Customs has kindly sent me a
> cheque. Would you advise me to record this as a negative value in
> Expenses:Income Tax or income in Income:Other Income?
>
> The money isn't actually income, I just accidentally "lent" it to the
> taxman ;). Likewise, it's not tax either, as I should never have sent to
> said taxman in the first place.
>
> I realise that this is an arbitrary decision, but I'd be interested in
> hearing what others have done in this situation.

I never knew what to do with it.  If you show it as an Expense, it will affect
the following year's profit, but the taxman won't allow it as a business
expense.  One way was to create a Provision for Income Tax, which is a
liability.  Then your refund would go there, and from there to Equity or
Capital.

Doug.
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