Structuring Categories in YNAB to Simplify Your Tax Planning & Preparation

My posts about how I set up and use YNAB have quickly become some of the most popular articles on my blog. So today, I’m combining talking about two of my favorite personal finance topics: YNAB and taxes.

This is genius. Set up YNAB to simplify your taxes. This is organizing your finances and budgeting to the next level!

Whether you prepare your own taxes (give yourself a pat on the back friend!) or you have someone else prepare them for you (hey, that’s good too!), organizing your tax information is essential.

As a tax professional, I’ve optimized my use of YNAB so that I have my tax numbers available for estimating my taxes throughout the year as well as checking that I’ve reflected everything throughout the year on my final tax returns.

Following are the specific ways I set up YNAB to make it as easy and simple as possible. Because even I (a self-proclaimed money nerd) don’t want to spend more time on my taxes than is necessary.

Break Out Gross Salary & Payroll Deductions

Most people simply enter their net paycheck as an “inflow to be budgeted” when they budget in YNAB. However, I like to see every single expense that I’m paying broken out. That definitely includes things like pre-tax retirement contributions, federal and state tax withholding, medical insurance and all those other payroll deductions.

By including gross income and not net income, I can get a better picture of my finances as well as quickly see how much I’ve paid in federal and state withholding for the year. After all, taxes are my single biggest expense and they might be yours too!

In order to do this in YNAB, you can set up categories for your payroll deductions and then use the split transaction feature when entering your salary income. Your gross income will go to inflow to be budgeted and you’ll allocate the rest to expense items for each payroll deduction. An example of the setup of these categories is shown below:

Break Out Other Income by Type

If you receive other types of income, ensuring that you keep the different sources or at least types of income together will make it easier to find out how much you need to report when it comes to estimating or preparing your tax returns.

Related Post: All Income Is Not Created Equal

Personally, I break out my other income between:

  • Sales of personal items on Craigslist or other sites (as long as they are sold for less than you purchased them, there are no tax consequences)
  • Miscellaneous taxable income, such as from side gigs
  • Interest income broken out by each individual account (this way I can match it up to the monthly statements and the 1099-INT at the end of the year)
  • Dividend income by brokerage account (this way I can match it up to the 1099-DIV form at the end of the year)
  • Gifts (not taxable)

An example of income being broken out is shown below:

In addition, to further simplify tax reporting, I suggest that you set up categories for your rental properties to coordinate with the Schedule E (page 2):

Business income can be set up in a similar manner, although categories will differ significantly based on the type of business that you have. Here’s an example of how you could set up your business categories to match the Schedule C:

Keep Tax-Related Expenses Separate

In addition to breaking out income, I also try to keep my tax-related deduction items separate. For example, I have two separate categories for charitable donations. One is for those that are tax-deductible and one is for non-deductible contributions, such as to our school or individuals.

Some of the specific categories I’ve set up to track separately for tax purposes include:

  • Real estate property taxes
  • Personal property taxes (car registration fees)
  • Contributions to HSA account(s)
  • Contributions to traditional IRA account(s)
  • Contributions to Roth IRA account(s)
  • Contributions to college 529 plan(s)

The best way to identify expenses that you should track separately is to go through your tax return line-by-line and ensure that you are capturing each applicable line. For example, this could also include childcare expenses, student loan interest, tuition payments, etc.

You can get exclusive access to my exact categories and accounts in YNAB by subscribing to my newsletter here.

Final Thoughts

I’ve found that after the little bit of initial setup, this process saves me a considerable amount of time when it comes to projecting and preparing my taxes. It’s still necessary to keep good documentation of all tax-related items, but it provides an additional check that I haven’t missed any deductions.

Just think of your happy self, relaxing on the beach on a sunny day in mid-April next year rather than scrambling through a year full of documents to figure out how much you spent on office supplies for your business.

YNAB is a great tool that you hopefully are already are using to help organize your financial life, so why not use it to organize your taxes as well? If you’re interested in more YNAB tutorials and/or exactly how I set up my categories and accounts in YNAB, go to my YNAB tutorial list here.

How do you use your budgeting system to make tax time easier? I’d love to know in the comments below!

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3 Responses

  1. Thank you for putting all of this info out here for us to use! Would you please post a screen shot of what an actual checking account transaction looks like when you record gross salary and make all appropriate deductions? I’m not following exactly how this works. Thanks!

  2. Kathryn,

    This is great, thank you for putting all this together.

    If I’m reading this correctly, for your rental income, you don’t categorize it to TBB, do you? It looks like you categorize that to the Rental-Income category.

    This messes up the YNAB Reports just a bit (but with the benefit that I can see P&L for the property itself).

    1. Yes, that’s correct. It will include that income as an offset to expenses in the YNAB report. Honestly, I don’t use TBB in YNAB at all. I’m well over a month ahead on expenses, so I use income categories for salaries & wages as well. I’ve also stopped including my rental income & expenses in YNAB starting in 2019 and set up a separated automated spreadsheet to track it (with a Tiller subscription). You can check that out on my YouTube channel if spreadsheets are our thing :).

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welcome!

I’m Kathryn Hanna-wife, mother of 3 and a Certified Public Accountant. I love to budget (really, I do!) , build spreadsheets and spend money on travel, sewing supplies and good chocolate.

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