Does Overpaid Tax Get Refunded Automatically?

Tax penalties often get more spotlight than tax refunds.

After all, no one wants to pay not a single dime extra on what they really owe to the IRS. Yet, if you think about it, if you don’t take your refunds (or don’t know how to claim them), you are essentially paying the IRS more than what you owe.

And you would be surprised by how much money people pay extra. According to the latest data, the IRS has refunded over $237M in total (average refund of $3039).

If you think you overpaid your estimated taxes or income taxes, there are ways to get back or apply that extra fund to the next year’s taxes. If you want to know the detailed process, this article is for you .

What Is Tax Refund?

The term Tax Refund is self-explanatory.

The term "tax refund" refers to a reimbursement made to a taxpayer for any excess amount paid in taxes to the federal or state government.

It thus applies to a situation where you have paid more than what you owe in taxes and now the IRS is liable to refund you the extra amount.

Tax refund situations arise for various reasons:

• Sometimes you pay your estimated tax throughout the year only to realize you can get a big tax break while submitting tax returns; or
• You might have paid too much from your wages in the form of withheld income tax; or
• You didn’t claim your tax credits (Earned Income tax credit or Child tax credit).

Whatever be the case, you want to take proper steps so that you get the money back. We will discuss them shortly. But first, let’s set your expectation right about how much you can count on the IRS.

Will the IRS Notify You If You’ve Overpaid?

So you overpaid your taxes. You can expect some from communication from the IRS, right?

The short answer is NO.

The IRS will probably not notify you when you have overpaid your taxes or withheld too much from your paycheck. In its defense, the IRS processes ridiculous amounts of tax returns, and notifying every taxpayer is not possible despite everyone’s best intention.

The point is, it’s on you to figure this out. Usually, you find about overpayment when you fill out your 1040 tax return. If you spot any, you can ask for the extra money back.

However, if you left some money on the table in the form of a tax credit, you may hear from the IRS.

There are a few credits that the IRS computers automatically check for.

• Child tax credits: Child tax credit is a tax benefit given to any US taxpayer with children under age 17. For 2023, the child tax credit was worth a maximum of $2,000 per dependent. It was higher in 2021, but that was a one year bump due to the COVID-19 pandemic. Usually you need to file Schedule 8812 (Form 1040) to claim this credit. However, if you missed this credit while filing or didn’t file at all, expect a response from the IRS.

• Earned income tax credit: Taxpayers who earn low-to-moderate income may qualify for the Earned Income Tax Credit (EITC or EIC), which reduces the tax amount that you owe and could entitle you to a refund.

• American opportunity tax credit: The American Opportunity Tax Credit (AOTC) helps taxpayers offset higher education costs paid on behalf of eligible students. The annual credit is worth $2,500 per student. If the credit drops your tax liability to zero, the IRS will refund up to 40% of any remaining amount of the credit (up to $1,000).

• Premium tax credit: Low to moderate-income households could qualify for a premium tax credit (PTC) which lowers the overall cost of available health insurance. These health plans must be selected from those offered through federal or state exchanges. If you use less than what you qualify for then you could receive the balance in a refund.

If they find you qualify but haven’t claimed them, they’ll send you a notice.

This notice tells you what your new (smaller) bill — or refund amount — will be. (In some cases, the IRS may ask you to provide additional information, or documentation, before it finalizes the correction.)

How To Reclaim Overpayments on Your Taxes

Good news: You can get the money back that you overpay on your taxes. You’ll just need to be patient.

There are three ways you can get this money.

Option #1: Get the extra money back as a refund

The simplest approach: Request your overpayment back as a tax refund. This works like any other refund — based on the final calculations at the end of your Form 1040.

When you file your taxes, just fill out the section that starts on line 34. Here, you’ll tell the IRS where you’d like your refund sent.

There’s actually more than one way to receive your tax refund. You can request that the government send you a paper check in the mail. Or you can decide to go for a direct deposit tax refund and have your money put into three different places, including savings and a retirement account.

Ready to get in on the investing game? You also have the option of using your tax refund to buy $5,000 or less in Series I savings bonds.

Whatever you decide to do with it, you have three years to claim your refund from the initial filing deadline. That’s good news if you miss the April due date or you still haven’t filed your taxes from three years ago. And if you were granted an extension, you’ll have three years from the extended deadline to ask for a refund check. The deadline for filing 2022 tax returns was April 18, 2023.

Unfortunately, you don’t always get to keep your entire refund. Sometimes, the IRS makes a mistake and sends you more money than you were meant to have. Anyone who owes child support or has overdue student loan bills may have some of their refund taken and applied to those debts.

If your refund check seems larger than it should be, you might want to wait before you head out on a shopping spree.

Option #2: Apply the extra money to your next tax bill

You can also apply your tax overpayment to your next estimated tax bill. Call it a prepayment.

Go to the same section of your 1040 where you’d request your refund as a check or direct deposit. On line 36, there’s an option to apply money to next year’s estimated tax.

Do you have to apply for the whole amount?

No, you can choose to apply for your whole refund, or part of it. Just specify the exact amount you want applied on line 36.

It’s completely possible to prepay part of next year’s taxes and get something back for yourself right away.

#Option 3: Amended return

An amended return is a tax return that is filed to make changes to a previously filed tax return. It captures all the original information when you first file but also includes anything that you need to change. In this case, it translates to adjusting your tax amounts or claiming your tax credits.

To file an amended return, you will need to use Form 1040-X, Amended U.S. Individual Income Tax Return, and follow the instructions.

It is important to note that it can take up to 16 weeks for the IRS to process an amended return.

Tracking Your Tax Refund

Once you file your taxes, you may be concerned about when your tax refund will arrive. Thankfully, the IRS has a tool on their website that can clear up your anxiety.

After you click on the “Where’s My Refund” link, enter your refund amount, your filing status and either your Social Security number or your individual taxpayer identification number. Then you’ll know whether your federal tax refund is on the way or there’s some problem that needs to be addressed. It’s that easy.

An app called IRS2Go provides another way to check your refund status. And if you’d rather use your phone to find out where your money is, you can call up the IRS Refund Hotline (800-829-1954). Note, though, that the IRS receives high call volumes.

It’s possible that your refund really is missing, especially if you’ve recently moved. After you’ve updated your address online, the IRS can send you a replacement check.

Bonus: How To Stop Overpaying Your Taxes

Overpaying taxes is certainly not as bad as underpaying your taxes. If the IRS received more than what you owed, you will certainly not get penalized. But, by overpaying you essentially give a free loan to the IRS. This extra refund amount can otherwise be used in so many ways, right?

Therefore, you can use the following methods to prevent overpaying your taxes.

Method #1: Use a dedicated calculator

Best for: People who have a sense of how much they’re going to earn

Some self-employed individuals  and W2 employees are lucky enough to know how much their annual earnings will be. For example, maybe you work with one or two anchor clients who give you pretty steady pay.

If that’s you,  use a quarterly tax calculator or income tax calculator  to quickly figure out how much tax you should pay per quarter.

Method #2: Take advantage of the safe harbor

Best for: People who expect to earn a significantly higher or lower amount than the year before

The “safe harbor” is a minimum amount you can pay to avoid getting penalized. Even if you end up technically underpaying, hitting the safe harbor targets keeps you, well, safe.

To use this approach, you must pay either:

• 100% of the amount you owed on last year’s tax bill, or
• 90% of this year’s upcoming tax bill (if you already have a good idea of what your income will be).

Whichever one you choose, divide into four equal payments, and there you have it!

Tip: When figuring out whether to use 100% of last year or 90% of this year’s income, use the lower number.

You’ll be safe as long as you hit either one of these amounts; might as well use the one that gets you the lowest estimated tax payments.

Method #3: Use annualized income installments

Best for: People who receive uneven income throughout the year

This one requires more math throughout the year. But it provides you with a more accurate payment per quarter. With it, you can pay little or no estimated tax for the quarters where you earn little or no income.

Basically, you:

• Calculate your total tax liability four times a year — before each quarterly payment due date — to get a snapshot of how your income fluctuates.

• Pay your estimated taxes based on that prorated income

How To Use the Annualized Income Installment Method

File IRS Form 2210 with your tax return the following April. This form explains why you made uneven payments every quarter and shows your annualized income calculations.

Recap

As a self employed person, you have to keep a tab on your personal and business incomes. That’s why you need a well-managed book to keep things on the track. A bookkeeping solution like Fincent can easily be the tool you need to keep your books updated. If you want to know how it can help, feel free to book a demo.

Frequently Asked Questions

How can I check the status of my federal tax refund?

You can check the status of your federal tax refund by using the IRS's "Where's My Refund" tool on their website. Alternatively, ring the number 800-829-1954 to use the automated system. If you want to speak with a representative,call 800-829-1040.

Can I check the status of an amended tax return refund using the "Where's My Refund" tool?

No. The "Where's My Refund" tool is only for original tax return refunds.

To check the status of an amended tax return refund, you may need to call the IRS at 800-829-1954 or speak with a representative by calling 800-829-1040.

Why did I receive a different amount for my federal tax refund than I expected?

Your refund amount may be different if you owed an overdue debt, such as child support or other federal payments. The Treasury Offset Program allows the government to withhold money from certain federal payments to pay for these debts.If you have questions about your refund amount, you can call the IRS at 800-829-1040 or your local IRS office.

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Can I have my federal tax refund directly deposited into my bank account?

Yes, you can choose to have your federal tax refund directly deposited into your bank account. This is a safe, reliable, and convenient way to receive your refund.

How long does it take to receive my federal tax refund?

Refunds are generally issued within 21 days of when you electronically filed your tax return, and longer for paper returns. You can use the IRS's "Where's My Refund" tool or call their automated system to get an estimated date of when you can expect your refund.