What Is an Overpayment in State Taxes?

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State and federal taxes both include an income tax on money earned by taxpayers. If the money is withheld from paychecks automatically, then the taxpayer rarely worries about the taxed income. If the taxpayer works at a job where taxes are not withheld, they must make estimated income tax payments to the state throughout the tax year. Sometimes this can lead to an overpayment in state income taxes that must be addressed.

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Definition of Overpayment of Taxes

An overpayment occurs when a taxpayer pays too much in income taxes. When paying estimated taxes, taxpayers must make four payments to the state throughout the year for that year's income taxes. These payments are often all for the same amount and should add up to the income taxes due for that year.

At the end of the year, if the actual tax return shows that a lesser amount is due than the sum of the payments, an overpayment has occurred. Overpayments an also occur in businesses in which the incorrect amount of income tax is withheld by companies. Overpayments can happen to anyone, but careful planning may help you to avoid this problem.

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Cause of Tax Overpayment

If a taxpayer knows exactly how much income tax to pay per year, then overpayment should not occur. Estimated taxes, however, are partially guesswork. A taxpayer typically has a choice of either paying a certain percentage or equal amount to last year's estimated taxes, or configuring taxes to a new amount based on how much they think they will earn in the coming year. Sometimes a taxpayer overestimates earnings, leading to greater tax payments than are warranted.

This may be particularly relevant to self-employed individuals who do not yet know what their earnings will be during the year. Someone who is self-employed and files Schedule C with their federal 1040 (on which state quarterly taxes are based) at the end of the year to report their income and expenses will have to guess what taxes they will owe, using careful calculations that are based on last year's income, expenses and payments. This can easily lead to variations in what's paid versus what's owed.

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Ultimately, it's important to pay the right amount, or to slightly overpay, as opposed to underwithholding. This is because underwithholding can result in penalties, come tax time, explains the IRS. Like at the federal level, states will usually pay interest on overpayments when you do receive that money back.

Process of Resolving Overpayments

When taxpayers file a tax return that shows an overpayment occurred, the state must correct the problem. Typically, this means that the state will pay the taxpayer a refund for the extra amount in the form of a check, which comes several months afterward.

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Sometimes a state may keep the extra amount for payment of other taxes that has not yet been made, especially if the taxpayer is late on some taxes.

Income and Tax Preparation Organizations

The Internal Revenue Service considers a tax refund the same as income, so it must also be taxed during the year the taxpayer receives it, which is the year after they have overestimated the payment. State laws can vary, however, affecting tax returns differently.

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Taxpayers may have to claim a refund from an overpayment, in which case they have a deadline of two to three years to make the claim before it is too late.

To avoid this sort of issue, you may wish to consult one of the many tax preparation organizations that are available to taxpayers to get assistance for the future. They can help you determine what you'll owe and help you to avoid overpayment or underwithholding.

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