Money gives you a set of generic categories and subcategories so that you can start entering transactions right away. To see the complete list, click the Categories button on the Navigation bar (you may have to click More first) and then choose Categories (or choose Accounts & Bills -> Categories & Payees or press Ctrl+Shift+C). The list is fine and dandy, but sooner or later you have to give serious thought to which categories and subcategories suit you, especially if you use Money to manage a business or track tax-deductible expenses. If you don’t see what you need in the generic lists, create your own! Sit down and compose a list of all the categories and subcategories you need for your business or personal finances before you begin creating categories and subcategories. That way, you get it right from the start and you lower the odds of having to recategorize transactions later on.

Creating a new category

Follow these steps to set up a new category in the New Category dialog box:

1. Click the Categories button on the Navigation bar, choose Accounts & Bills -> Categories & Payees, or press Ctrl+Shift+C. Doing so takes you to the Categories window.

2. If necessary, click the Categories button on the left side of the window to see the Categories list. While you’re viewing the window, you may want to scroll down the list of categories and subcategories and examine the ones already there. Expense categories appear at the top of the list and Income categories appear at the bottom.

3. Click the New button along the bottom of the screen. The New Category dialog box appears.

4. The Create a New Category? option button is already selected, so click the Next button. The New Category dialog box offers places for entering a category name and category type.

5. Type a name for the category in the Name text box. The name you enter will appear on the Category drop-down list when you record transactions, so be sure to choose a meaningful name.

6. Select the Income or Expense option button and click the Next button. All categories fall under the Income or Expense heading. Income categories describe sources of income; expense categories describe how you spend money.

7. Select a category group from the list. A category group is a broad means of defining the category. Money uses category groups to make calculations in the Tax Estimator, Home Worksheet, and other features. When you select a category group, a description appears on the right side of the dialog box.

8. Click the Finish button. There it is your new category, alive and kicking in the Categories & Payees window. Open the View menu in the Categories window and experiment with the different views. Categories, Subcategories, and Their Category Groups was chosen from the View menu. The other options can be useful when you’re looking for a category in the list.

Creating a new subcategory

The best way to create a new subcategory is to go straight to the Categories window and start from there. Follow these steps:

1. Click the Categories button on the Navigation bar, or choose Accounts & Bills -> Categories & Payees to go to the Categories window.

2. If necessary, click the Categories button to view categories. You will find this button on the left side of the window under View.

3. Select the parent category of the subcategory you want to create. In other words, to create a subcategory of the Education category, scroll to and select Education in the Categories window.

4. Click the New button. You see the New Category dialog box.

5. Select the Add a Subcategory to an Existing Category option button; then click Next.

6. Enter a name for the subcategory in the Name text box; then click Next.

7. Select a category group. Category groups are another one of those bold attempts by Microsoft to do your thinking for you. The Tax Estimator and other features you select can use the group you select in budget projections and tax estimations.

8. Click the Finish button. Check it out your new subcategory appears in the Categories window underneath its parent category.

Getting Ready for Tax Time with Tax-Related Categories

Giving a category tax-related status when you create it is one thing. But how do you give an existing category tax-related status? Simply, that’s how. Money offers a special window for handling tax-related categories. In the window, you can select a check box to make sure a category is figured into the tax reports you can generate with Money. And you can assign a category or subcategory to a line item on a tax form. The Tax Software Report makes filling out income tax forms easier. All you have to do is get the figures from the report and plug them into the right places on the tax forms. However, to make the process work, you have to know more about the tax forms than most people know or care to know. Follow these steps to give an existing category or subcategory tax-related status so that it is figured into tax reports, and, if possible, assign tax forms and line items to a category or subcategory:

1. Click the Categories button on the Navigation bar, or choose Accounts & Bills -> Categories & Payees to get to the Categories window.

2. Click the Set Up Tax Categories hyperlink. Where possible, the generic categories and subcategories that Money creates automatically are assigned tax forms and form lines. You can see them by scrolling down the list. Tax-related categories show an X in the Tax column. In the Tax Form and Form Line columns, you can see where tax forms and lines have been assigned to categories and subcategories.

3. Scroll down the list until you find a category or subcategory whose tax status needs changing; then click the category or subcategory to select it.

4. Select the Include on Tax Reports check box.

5. Click the down-arrow on the Tax Form drop-down list and select a tax form. Being able to tag categories and subcategories to tax forms (such as a W-2, Schedule B, or Form 1040) is a neat idea, but you have to know the tax forms well to pull it off. You have to know, for example, that taxexempt interest is reported on the Interest Income line of the Schedule B form. Who (besides a tax accountant) knows that? If you want to be able to run Tax Software Reports, study your income tax returns from past years to see which forms and form lines to assign to the categories and subcategories that you use. You can also speak to an accountant. Be aware that tax forms change yearly, so what goes on one line one year may go somewhere else the next.

6. Click the down arrow on the Form Line drop-down list and select the form line on which the income or expense is reported.

7. If you use multiple forms (more than one W-2, for example) to report your income, enter the number of forms you use in the Form Copy text box.

8. Click the Back button to return to the Categories window.

Correcting Transactions Recorded in the Wrong Category

Don’t feel foolish if you recorded transactions in the wrong category or subcategory. It happens all the time. Luckily for you, Money offers a special button called Move for reassigning all the transactions in one category to another category. And if you need to reassign only a handful of transactions, you can use the Find and Replace command to reassign transactions one at a time. The Move button is very powerful indeed. When you use the Move button to reassign all the transactions in one category to another category, you delete the first category as well. For example, suppose that you assigned the Vacation category to a bunch of transactions when you should have assigned the Leisure category. If you use the Move button to move all the Vacation transactions to the Leisure category, you delete the Vacation category from the Categories list as well as move the transactions. Use the Move button only when you want to drop one category altogether and move all its transactions elsewhere. Another point about the Move button: If you attempt to move transactions in one category to another category and the category you want to move includes subcategories, you lose the subcategory assignments when you make the move. However, you can move subcategory assignments from one subcategory to another subcategory with the Move button.