Tax Overpayment

Tax Overpayment refers to the excess amount paid as taxes rather than what the taxpayer actually owes to the government. Such an amount is recoverable as a tax refund (although not in total) by the taxpayer upon filing a refund claim within a specific time frame.

Such an overpayment of taxes is applicable to income, excise, employment, property, stamp, and gift taxes. Throughout the year, employees' tax liability is often unknown due to employer deductions from paychecks. The condition of overpayment arises when the tax liability is lower than the paid amount.

• Tax overpayment refers to any amount paid in surplus during a given tax year when compared to what the taxpayer owes.
• Such an excess tax payment can be claimed as a refund by the taxpayers in the subsequent tax year by requesting the refund in the applicable lines on Form 1040 of the Internal Revenue Service (IRS).
• There can be various ways of receiving the refund payment, like a direct deposit in the taxpayer's account, a check, an adjustment in next year's tax liability, or the purchase of savings bonds or other marketable securities from the Treasury Department.

Tax overpayment occurs when an individual pays more taxes to the government than what is due. Generally, the employees receiving salaries post the Tax Deducted at Source (TDS) deductions may inadvertently overpay taxes compared to their actual liability. 

Moreover, employees may become ineligible for tax liability if they lose their jobs mid-year or due to illness. However, they would have already overpaid the taxes during the period they were employed. Individuals may need to claim tax rebates or credits for certain expenses, recouping any tax overpayments. In any such case, they are eligible to get a refund for the surplus tax amount paid by them. 

Different countries and states have distinct regulations pertaining to overpayment and underpayment. Simultaneously, their refund procedures and criteria vary from one another. Excess tax payments, whether made accidentally or carelessly, burden taxpayers and require them to apply for refunds, increasing their workload.

When taxpayers make additional tax payments with the Internal Revenue Service (IRS) during a particular tax year, they can find a due refund for the same in the respective section of Form 1040. The taxpayer must put in the right amount of refund to claim it. Also, they should evaluate IRS refund options like direct deposit or purchasing savings bonds.

Simultaneously, the taxpayers need to mention the preferred payment method for the due amount. It is notable that the taxpayers may or may not receive the total amount owed as a refund. It depends considerably on the timely claim of such overpaid tax refunds. The various forms for individual filing include Form 1040, 1040-SR, and 1040-X. Whereas for corporations, such claims are made through Forms 1120, 1120X, or 990-T.

A taxpayer can choose from the following ways to receive a refund for overpaid taxes. Some of these are:

1. Partial or complete refund through a check received by post or by mail;
2. Direct deposit of the partial or complete refund amount to the taxpayer's account with their bank, financial institution, or credit union;
3. Buying Series I savings bond or other marketable securities by requesting the tax overpayment refund in a Treasury Direct account opened online;
4. Adjusting a portion or overall refund amount in the next tax year.

To get a refund via direct deposit, choose this option on the e-file page for federal returns. Further, fill in the taxpayer bank account information, including the depositor account number (DAN) and the routing transit number (RTN) on this page. A canceled check should support it. Taxpayers can claim a tax overpayment refund for the current year on the following year's estimated tax by filling out Form 1040. The taxpayer can either leave the refund line blank or fill in with 0 for a full refund claim.

As we move further, let us discuss some cases to understand how an overpayment takes place and what happens next.

Example #1

As per a statement issued by Cook County Treasurer Maria Pappas, over 9,000 property owners in Cook County are eligible to receive automatic property tax overpayment refunds totaling $30.5 million after having overpaid their first installment of last year's property taxes. Most property owners won't need to fill out any forms to get refunds, as stated in the release.

Approximately 48% of the refunds, totaling $13.1 million, will be credited directly to the bank accounts of approximately 1,900 homeowners who originally paid their property taxes online. Additionally, nearly 4,000 homeowners who paid their taxes through a mortgage escrow account or bank will receive refund checks by mail, amounting to $8 million.

Moreover, about 2,900 homeowners who paid taxes totaling $9.3 million in cash or check will either receive an electronic refund or will be provided with a refund application to ensure the correct recipient receives the refund. Many tax overpayment refunds will benefit homeowners newly eligible for property tax exemptions like senior citizen, senior freeze, or disabled personal exemptions after the first installment due date.

Example #2

In 2022, an estimated 3,17,054 individuals in Ireland were reported to have overpaid their taxes, representing a significant increase from the previous year, when nearly 2,60,000 PAYE earners had made tax overpayments. Those who overpaid and subsequently filed a return received an average refund of €700. Additionally, Taxback.com revealed that the average refund received by their customers amounted to approximately €1,880.

Moreover, considering the specific tax reliefs, the rent tax credit in 2022 provided a maximum value of €1,000 per year for jointly assessed couples, while it capped at €500 for all other cases. Indeed, the authorities allowed the individuals a tax relief of 20% on medical expenses, including GP visits costing around €60 per visit and offered a tax relief of up to €10,000 on nursing home expenses amounting to €50,000 annually.

There was tax relief for third-level tuition fees at a standard rate of 20%, with a limit of €7,000 per course. Additionally, the relief included a disregard amount of €3,000 for full-time courses and €1,500 for part-time courses. While not considering these tax reliefs, many individuals landed in tax overpayments.

Example #3

Suppose John, an employee at XYZ Ltd., received his monthly paycheck after the deduction of income tax. They fired him from his job after he had worked for only three months in a particular tax year. Also, John remained unemployed for the rest of the tax period. Therefore, he would not be liable to pay any income tax in the particular tax year and would be eligible to claim the refund of the tax overpayment (i.e., the 3 months' tax amount deducted from his paycheck).

Tax overpayment and underpayment often arise when taxpayers wrongly estimate their tax liability for a given tax year. The HM Revenue and Customs (HMRC) tax overpayment and underpayment can be assessed to determine whether a taxpayer is making an appropriate tax payment. However, both of these cases require specific actions, which determine the difference between the two situations as follows:

This article has been a guide to Tax Overpayment and its meaning. Here, we explain how to claim refund, its examples, & comparison with tax underpayment. You may also find some useful articles here -

• Tax Strategy
• Tax-Exempt Interest
• Tax Code