Overpayment

What is Overpayment? 

Overpayment in tax occurs when individual taxpayers or businesses pay more to tax authorities than what is actually owed in that particular tax period.  The excess amount is usually recoverable as a tax refund (although not in total) by the taxpayer if they file a refund claim within a specific time frame.   

Causes of Overpayment 

Here are some of the main causes: 

• Misunderstanding tax withholding instructions is one of the most common causes of overpayment.    

• Entering incorrect data 

• Misjudging income or failing to account for deductible expenses. 

• Not updating tax withholding after life changes like marriage, having a child, or a new job.  

• Incorrectly filing as an employee instead of an independent contractor or vice versa. 

• Improper use of credits and exemptions like the Earned Income Tax Credit (EITC) or the Child Tax Credit.   

• Exceeding allowable contributions to IRAs or HSAs can lead to excess tax payments. 

Steps to prevent overpayment 

To avoid overpaying, there are a few proactive measures one can take. Using IRS resources, such as Publication 596 for the EITC or Form 1040-ES, can help determine eligibility and ensure accurate claims as well as aid in accurate quarterly payment calculations. Regularly reviewing withholding preferences and adjusting Form W-4, especially after major life changes like marriage or the birth of a child, is important. Maintain records of deductions, such as charitable contributions, student loan interest, and medical expenses, to claim all eligible tax benefits. 

Claiming Refund 

Taxpayers can claim a refund for overpaid taxes by filing the appropriate tax form. Individuals use Form 1040, 1040-SR, or 1040-X, while corporations use Form 1120, 1120X, or 990-T. 

Refunds can be received via direct deposit into a bank, credit union, or financial institution, or by paper check mailed to the taxpayer. The IRS also allows taxpayers to apply part or all of their refund toward purchasing Series I Savings Bonds. 

The total refund amount depends on various factors, including any outstanding debts owed to the government. To claim a refund, taxpayers must file their claim within three years of the original due date of the return (or within two years of tax payment, whichever is later).