Correct way to split payment to liability that is an expense when paid?

EmKay

I have medical bills that I'm paying over time.  I have those bill accounts set up as liability accounts in Quicken (because I want to be sure to not overpay, and want to see the balance decline).

What's the correct (accounting-wise) way to enter this transaction as a recurring reminder/bill?  I currently have a reminder set with a total amount = the amount I pay each month ($200), and split with $200 to the expense category (health:doctors), $200 to the liability account - and then I have an uncategorized offset of -$200 just to make the transaction reconcile with no remainder amount.  Those uncategorized amounts are ... uncomfortable, to me.  I read in these forums that Quicken for Mac has a built-in "Adjustment" category that is excluded for reports.  Is there any such thing in Q for Windows?

q_lurker

Fundamentally, the health:doctor expense occurred when you created the liability account and entered the total debt of $XXXX.  The $200 you spend each month is not a payment assignable to that health:doctor category.  Rather it is as you are doing a transfer to that liability account paying down the debt owed. 

So skip the split and keep it simple.  

Frankx

Hi @EmKay,

When you setup those liability accounts - which account, or accounts, were the other sides of those entries?  Did you create a liability and then post the other side to the "Medical" [expense] category?

If so, you are duplicating the "expense category" (to use your words above) every time that you make a payment to pay down those liabilities.  That unfortunately is going to double the amounts you are recording in Quicken as Medical Expenses for the year.  And I haven't even addressed the question of trying to post a "three part" transaction that you described above.

I suggest that - if you've already setup the liabilities (as you state you did above) that any payments be two-part transactions.  Namely, you should reduce the bank account from which you make the payment (a credit in accounting terminology) and you post the other side of the transaction (a debit in accounting terminology) to the liability accounts that you previously setup.

At the end of the day your "books' will balance and all will be right with the world... Oh and let's have no more talk of "three part" transactions - OK? 

Frankx

EmKay

q_lurker said:

Fundamentally, the health:doctor expense occurred when you created the liability account and entered the total debt of $XXXX.  The $200 you spend each month is not a payment assignable to that health:doctor category.  Rather it is as you are doing a transfer to that liability account paying down the debt owed. 

So skip the split and keep it simple.  

Wait - I thought that, for tax deductions, etc., a medical debt isn't deductible until I actual PAID on it.  Isn't that true?  So I want the monthly payments to show up in my end of year reports for the amounts I actually paid in the tax year.  If I incur a $2000 debt in 2021 but only pay $1000 of it, I can't deduct $2000, only $1000 - isn't that correct?

So I really want the payments to be shown both against the liability and as the actual expense.  

If I'm wrong, let me know.  It's nearly impossible for me to keep straight accounting and tax rules, unfortunately!

EmKay

@Frankx - I'm so confused.

The account is a liability account.  I enter the balance I've been billed for a surgery as the starting balance, charged back to the liability account itself.   The expense isn't incurred (at least, I don't believe it is) until I actually make a payment.  I budget for monthly payments on the expense of "medical bill," not on the liability account, because I could have multiple medical bill payments to make.

If my transactions to pay down that liability only 1) deduct from the bank account (credit card) from which I am paying and 2) go toward the liability - where is my expense for the monthly that I paid it being recorded?  See my reply/question to @q_lurker, above.  Maybe that's where I'm not understanding your answers correctly.

Frankx

Hi @EmKay,

Okay, so from what you've said above, here's where I think you are, and what you should do going forward.

Where you are -

a) you setup a liability with a "one-sided entry" - when you create an account (like a liability account in this case) and record the other side of the entry to that same account.  In accounting or bookkeeping for that matter - this is not kosher, but in the Quicken world it is alive and kicking.

b) you are correct that the expense (and the tax deduction) is not incurred until you actually make the payment(s). 

c) your current payments are being posted to the liability account and therefore the medical expense is not being recorded in Quicken.

My suggestions for going forward - 

1) starting with the first payment you made after you setup the liability, your entries for each payment should be posted to the "medical expense" category (which means that you should also change all those that were posted to the liability account in Quicken to the medical expense category).  And use this same routine for all the payments you make in the future until the liability is paid-off.

2) assuming that you still want to keep that medical liability account in your Quicken file (to know where you are as far as the balance is concerned going forward) you'll also need to make a second entry each time you make a payment.  Those entries should be made in the Quicken register for the medical liability account.  And the "category" that you'll need to use for those entries will be the [name of the account] - that is the name of the Medical Liability account in Quicken in square brackets, like this [Medical Liability]. 
And since you haven't been doing this in the past, you'll need to do a "catch-up" entry (or entries if you prefer) for all those payments that you changed the category on in Step1) immediately above. 

This approach will keep your accounts (mainly the medical liability account you had setup) and categories (including the medical expense total that you'll need for tax time) in good order.

Let me know if you have any follow-up questions.

Frankx

Sherlock

I'm not a CPA but my understanding is you may include the medical expense when you paid the expense - not as you pay off the debt incurred.  

From https://www.irs.gov/publications/p502

 If you use a credit card, include medical expenses you charge to your credit card in the year the charge is made, not when you actually pay the amount charged.

volvogirl

Regarding taxes, do you itemize deductions or take the Standard Deduction?  You can only deduct the amount of unreimbursed Medical Expenses you actually paid over 7.5% of your AGI.  And then all your itemized deductions has to be more than the standard deduction to get any benefit (so you would only be getting the benefit of the amount that puts you over the standard deduction).

Only what you actually paid during the year.  Medical is deductible the year when you pay it.  If paid by check, it would be when you gave the provider a check. You can only deduct the payments you made but not any interest.

If by credit card, it would be when the charge was made. Putting it on your credit card is the same as paying it.  You can deduct the full amount.  But you can't deduct any interest or penalties you paid on it.

If you put it on a credit card or took out a loan you can deduct the full amount even though you pay it over time. If you are on a payment plan with the hospital or doctor, etc. then it's only the amount you pay. Either way you only can deduct the principal amount, not any interest.

Frankx

Hi @Sherlock

The OP has not used a credit card, rather they are making payments over time. 

The first post above starts as follows: "I have medical bills that I'm paying over time.  I have those bill accounts set up as liability accounts in Quicken (because I want to be sure to not overpay, and want to see the balance decline)."

Frankx

volvogirl

I know, see the last sentence.   I just was posting all the different ways.

Sherlock

Frankx said:

Hi @Sherlock

The OP has not used a credit card, rather they are making payments over time. 

The first post above starts as follows: "I have medical bills that I'm paying over time.  I have those bill accounts set up as liability accounts in Quicken (because I want to be sure to not overpay, and want to see the balance decline)."

Frankx

If these are medical payments entered as transfers toward a pseudo liability account, they may be assigned an appropriate Schedule A tax-line to enable them to be tracked as such.  The original medical expenses may be applied in the pseudo account without the tax-line assignment.  This enables you to correctly view the medical debts as they actually accumulate and the medical payments as they are made.

q_lurker

EmKay said:

q_lurker said:

Fundamentally, the health:doctor expense occurred when you created the liability account and entered the total debt of $XXXX.  The $200 you spend each month is not a payment assignable to that health:doctor category.  Rather it is as you are doing a transfer to that liability account paying down the debt owed. 

So skip the split and keep it simple.  

Wait - I thought that, for tax deductions, etc., a medical debt isn't deductible until I actual PAID on it.  Isn't that true?  

You had not identified the tax consideration in your original post, so I was not answering from that perspective. 

Another method for the tax aspect not already mentioned is to use the Tax Schedule assignments for the account.  Now it shouldn't be this hard, but for my test file, I found I needed to create an asset account with a negative value rather than a liability account.  For the Tax Schedule assignment, I indicated Transfers into that account were assigned to "Schedule A:Doctors, Dentists, Hospitals" (other choices should also work).  Further, I needed to look at the Tax Schedule Report rather than the Schedule A report to see the results presented.  Transfers from [Checking] (or any other account) to the [Medical Debt] asset account get reported on the Tax Schedule Report as Schedule A, Doctor, Dentist, Expenses.  I did not try other permutations.  I only got this to work for an asset account getting the transfer in, not for a liability account.

That brings to mind another possibility -- 
You have a transfer from [Checking] to [Medical Debt] for $1000. 
Right-Click the transaction.
Select Tax Line Assignment
Select the applicable Schedule A line 
This method essentially is a subset of what I just suggested.  The first suggestion, all transfers to [Medical Debt] get the tax line assignment.
This second method, specific chosen transactions get reported for that tax line, even if their category or transfer status says otherwise.

HTH 
     

EmKay

I wish this forum let me reply to each comment, not just to the thread.  I am getting confused and, as I am replying to multiple people, this may be a confusing reply.

First of all, here is what I'm currently doing that I don't like (hoping this screenshot posts, not sure how to make it smaller, so sorry!):

The Health:Doctors expense category is aligned with the appropriate Schedule A tax line item.  I do not usually itemize, but want to check every year to see if I ever can.  That and budgeting is why I want to know how much I'm paying to this liability every month/year.

The [Piedmont Hospital] split line is the liability account.  (Please know - I've been using Q for ... how long has Quicken existed?  I know how to use it, just don't know the right way, sometimes.)

In order for this transaction, which is being entered in my American Express credit card account, to total the $200 payment being made, there is currently that last, non-categorized entry of -$200, where I've entered a comment of "to balance."  I feel like there should be a category of some sort on that line to be in line with proper accounting.  I read in another post that Quicken for Mac has a built-in category called "Adjustment" for this purpose.  

It is that third line of the split, shown in my screen shot, that is causing me "angst," because it is an uncategorized entry in Quicken - and, on a monthly basis, I run a report of all uncategorized transactions just to make sure that everything I've spent is budgeted for - everything should have a category, and entries like this mean I have to re-review something I've entered deliberately.

I'm guessing that I should just set up my own manual "Adjustments" category.  I just wondered what everyone else does with these.  I'm having a hard time imagining that I'm the only one with this situation!

Sherlock

EmKay said:

I wish this forum let me reply to each comment, not just to the thread.  I am getting confused and, as I am replying to multiple people, this may be a confusing reply.

First of all, here is what I'm currently doing that I don't like (hoping this screenshot posts, not sure how to make it smaller, so sorry!):

The Health:Doctors expense category is aligned with the appropriate Schedule A tax line item.  I do not usually itemize, but want to check every year to see if I ever can.  That and budgeting is why I want to know how much I'm paying to this liability every month/year.

The [Piedmont Hospital] split line is the liability account.  (Please know - I've been using Q for ... how long has Quicken existed?  I know how to use it, just don't know the right way, sometimes.)

In order for this transaction, which is being entered in my American Express credit card account, to total the $200 payment being made, there is currently that last, non-categorized entry of -$200, where I've entered a comment of "to balance."  I feel like there should be a category of some sort on that line to be in line with proper accounting.  I read in another post that Quicken for Mac has a built-in category called "Adjustment" for this purpose.  

It is that third line of the split, shown in my screen shot, that is causing me "angst," because it is an uncategorized entry in Quicken - and, on a monthly basis, I run a report of all uncategorized transactions just to make sure that everything I've spent is budgeted for - everything should have a category, and entries like this mean I have to re-review something I've entered deliberately.

I'm guessing that I should just set up my own manual "Adjustments" category.  I just wondered what everyone else does with these.  I'm having a hard time imagining that I'm the only one with this situation!

This is how we would do it:

The original Health:Doctors expense transaction would be in the Piedmont Hospital account.
The partial payment transaction would be a transfer to the Piedmont Hospital account.

If we wanted to track the partial payments as a deductible medical expense, we would set the tax-line for the transfer transaction. 

If we did not want to track the original Health:Doctors expense transaction as a deductible medical expense, we would clear the tax-line for the expense transaction.

q_lurker

You are getting a variety of suggestions from various people.  As experienced users, yourself included, we often have different approaches.  To Quicken's credit and sometimes its detriment, that multitude of approaches can create confusion.  There is not necessarily one best way to address sticky situations.

You can 'reply' to individual comments by "quoting" part or all of their comment, and then entering your response.  Hopefully, you can see the "Quote" option along the bottom of each post.  That quotes the prior post in the reply box. 
 
My suggestion in pictures.
a)  Set up for transfers into the Piedmont Hospital liability account details to be reported through Tax Schedule information as a Schedule A deduction.



b)  In your AMEX account, record the transaction as a transfer to the Piedmont Hospital account.  In my picture, I have the entry as a Checking account transaction.  Same effect.  The liability account gets reduced by whatever payment is made to it. ($1000 in my test transaction.)  There is no split involved in the recorded transaction.



 c)  For the tax consideration, look at the Tax Schedule Report.


Solely because of of the Transfer In setting for the account (first picture), the transaction appears as a reported (possible) Schedule A medical expense.

If you ask for a report on the category Health:Doctor, this transaction will not show.  But this method avoids the uncategorized split that is giving you angst.

Hope this helps.

Frankx

Hi again @EmKay

Since we are doing pictures - here is a visual portrayal of my solution suggested above.  As a reminder I suggested that you make two entries each month as follows:

1) the first is the actual payment from your checking account to the hospital on the medical "liability" that you are paying off over time.  This entry will record the amount being paid, specifically it reduces your checking account balance and - since it is posted to a medical expense category that already has a "tax line" assigned automatically - it also records and tracks your medical expenses for tax purposes.

2) the second is an unusual entry that will be posted directly in the "medical loan" account register - I've used "Piedmont Hospital" when I created this loan account.  This is the entry where you'll be using a category that is the name of the account in square brackets i.e. [Piedmont Hospital], which will record the reduction of the loan balance for the payment you are making.

Here's a pic of Entry # 1



Here's a pic of Entry # 2


These two entries made each time you make a payment will solve all your accounting problems - I promise!

Frankx

volvogirl

I vote for Frankx entries!  I like his idea.  Seems clear.

Sherlock

volvogirl said:

I vote for Frankx entries!  I like his idea.  Seems clear.

@volvogirl The issue with Frankx's approach is you need to enter both transactions correctly and Frankx couldn't even do that in the example he provided. 

There's little difference between my approach and q_lurker's.  He provides an example of one way of setting one tax-line but says nothing about the handling of the original expense.  I preferred to allow the user to set the tax-line on the transaction as it may vary.

Frankx

@Sherlock

You said:

Sherlock said:

volvogirl said:

I vote for Frankx entries!  I like his idea.  Seems clear.

@volvogirl The issue with Frankx's approach is you need to enter both transactions correctly and Frankx couldn't even do that in the example he provided. 

Quite to the contrary - I entered both transactions exactly the way that I described them, and they worked exactly the way I said they would. 

Perhaps you should try looking at them using your monocle???

Frankx

Sherlock

Frankx said:

@Sherlock

You said:

Sherlock said:

volvogirl said:

I vote for Frankx entries!  I like his idea.  Seems clear.

@volvogirl The issue with Frankx's approach is you need to enter both transactions correctly and Frankx couldn't even do that in the example he provided. 

Quite to the contrary - I entered both transactions exactly the way that I described them, and they worked exactly the way I said they would. 

Perhaps you should try looking at them using your monocle???

Frankx

If you don't care to correct your error, that is your choice.  It just goes further proves my point.

Hint:  $200 does not equal $500

EmKay

q_lurker said:

...You can 'reply' to individual comments by "quoting" part or all of their comment, and then entering your response.  Hopefully, you can see the "Quote" option along the bottom of each post.  That quotes the prior post in the reply box. 
 
My suggestion in pictures.
a)  Set up for transfers into the Piedmont Hospital liability account details to be reported through Tax Schedule information as a Schedule A deduction.
...
Hope this helps.

@q_lurker - I do see that I can quote each person's comments and reply to them, one at a time.  Some forums let you copy/quote and include multiple quotes from multiple users in one reply.  That would make replying easier to follow, I think.  But I'll go with this way, for now.  

I do see that I missed the point of setting up the liability account for tax handling of transfers into it.  That makes it more clear - but it does leave off the possibility of easily including the payment in my budgeting reports.  I'll have to remember to include transfers to some, but not all, accounts, in my budget reports.  That's a pain.  Your solution is pretty logical, though.

@Frankx - I think your solution is to enter the transaction twice - once in my Amex account as a categorized expense, and once in the Piedmont account as a simple uncategorized reduction of balance due, am I right?  That works - but it's twice the work / twice the memorized transactions, isn't it?

@Sherlock - I'm having kind of a hard time understanding your suggestion.  I don't get
"The original Health:Doctors expense transaction would be in the Piedmont Hospital account.
The partial payment transaction would be a transfer to the Piedmont Hospital account."
Where, with this, does it hit my Amex account (which I'm using to make the payment?)

q_lurker

EmKay 

@q_lurker - I do see that I can quote each person's comments and reply to them, one at a time.  Some forums let you copy/quote and include multiple quotes from multiple users in one reply.  … 

You can do that here also.  Quote the first. Comment as necessary. Scroll back up and quote another. Comment. Obviously I also like to edit down the quoted part to what I am replying to. 

Sherlock

EmKay said:

@Sherlock - I'm having kind of a hard time understanding your suggestion.  I don't get
"The original Health:Doctors expense transaction would be in the Piedmont Hospital account.
The partial payment transaction would be a transfer to the Piedmont Hospital account."
Where, with this, does it hit my Amex account (which I'm using to make the payment?)

As you're tracking your medical expenses in the Piedmont Hospital account, that is where the expense transactions should be entered.  I'm suggesting you use the appropriate medical expense categories on these entries instead of a balance adjustment (self-referencing transfer) others implied.  This enables you to view all your medical expenses by category when they actually occurred across accounts.  If it helps, think of the Piedmont Hospital account like a credit card account.

If you're issuing the partial payment for these medical expenses in the Piedmont Hospital account from the Amex account, you should enter the partial payment as a transfer from the Amex account to the Piedmont Hospital account.

For tax tracking purposes, you want the transfer in the Amex account to be associated with an appropriate tax-line so as to reflect when the actual payments for the medical expenses are made.  This may be achieved a few ways.  For example, right click on the Amex transaction and select Tax-line item assignments.  Note: If you're making regular payments, you may use a reminder with the appropriate tax-line and enter the transaction in advance of the import from Amex.

If the tax-line is associated with the transfer, you don't want it on the expense transaction in the Piedmont Hospital account.  Again, this may be achieved a few ways.  For example, right click on the expense transaction in the Piedmont Hospital account and select Tax-line item assignments.

Frankx

Hi again @EmKay,

You are absolutely correct - my solution did require 2 transactions per month. 

The reason for this is that you want to track both the "real life" payment of a medical expense through your checking account which is cash-basis accounting, as well as the status of your outstanding debt (liability, or account payable) to the hospital, which is accrual accounting.  My solution also accomplishes what you wanted concerning tracking the (potential) medical expense deduction that may be permitted on your tax return.

I tried, but wasn't able to create a one entry solution to your problem - sorry.

Other than that, all I can say is that I hope this accomplishes your goal and if somebody else can provide you with a one that is simpler or more effective or more efficient you should take it.

Frankx

q_lurker

Frankx said:

Hi again @EmKay,

You are absolutely correct - my solution did require 2 transactions per month. 

...

You could, however, enter one transaction that would combine these two entries. I did not suggest that earlier because it would be a combined entry, which could be deemed more confusing than the two entry presentation I initially suggested. ...

And that split entry transaction is almost identical to the one @EmKay posted above 10/4 at 6:09 PM - the one he indicated was causing him "angst".  

EmKay said: ... 

versus



And the reason that doesn't work @Frankx is that the two [Piedmont Hospital Liability] references cancel each other and the liability account will not properly decrease.  One could make up some other bogus category for that second [Piedmont Hospital Liability] account, but I don't see that really clarify matters any --- aka EmKay's angst. 

@EmKay:  It seems to have come down to EITHER one entry relying on the Tax Line Assignment approach (Sherlock and I have offered slightly different variations on that) OR two independent transactions as suggested by @Frankx.  

Hope we are close to bringing this to a close. 

Frankx

Hi @q_lurker, and @EmKay

For the record, I did initially try to find and propose a 1 transaction solution that I posted in response to @EmKay's post of 6:38pm which wanted a one post solution. 

I created a one transaction approach with the transaction originating in the checking account that seemed to combine the 2 entry approach I posted yesterday, and reach the one transaction goal, and I then posted that at 7:45pm today. 

However I then double checked the transaction, and saw that it did not actually reduce the liability account properly (because it originated in the checking account rather than the liability account). I immediately (at 7:53pm) revised my post to indicate that the 2 transaction post was the only solution I could make.

@q_lurker:

I am not sure which hymnal you are singing from, but there is no post by @EmKay on "10/4 @ 6:09pm".

In addition - you are clearly incorrect in saying: "And the reason that doesn't work @Frankx is that the two [Piedmont Hospital Liability] references cancel each other and the liability account will not properly decrease. I have proven that the use of the 2 transaction approach works, when - as I initially suggested - one transaction originates in the checking account and the other originates in the hospital liability account.

Frankx

q_lurker

@Frankx I am not sure if we are talking past each other or not.  I agree your 2 transaction approach is viable.  That was my final message.  I was objecting ONLY to your one-transaction version that used two split lines going to Piedmont Hospital account with equal and opposite amounts as shown in the pictures I included.  That can't work.  I apparently caught your post after your initial version and before the edited correction.   

Granted, the 6:09 PM time is central time, not sure where you are, but that is also why included his screenshot and your screenshot.  Your 7:45 / 7:53 references hit me as 6:45 / 6:53, so apparently you are east coast.

Peace.