Applying Tax Refund to Next Years Estimated Taxes

Taxes are paid throughout the year in general, this is something every U.S taxpayer knows. You can usually expect a refund for that year when you’ve paid more than you owe. In these types of cases, your refund can be applied to your estimated taxes for next year.

The refund amount will apply to your first estimated tax payment if you prefer to use your refund toward your estimated taxes. This is until all of the refunds have been utilized. 

What is Estimated Tax Payments?

There are taxes withheld from the most income you receive. However, no taxes are withheld with some income but you are still required to pay taxes on the income. You must pay the taxes as you earn or receive the income.

Here is a list of income that has no taxes withheld:

• Self-employment income
• Investment income
• Income from rents and royalties
• Income from partnerships and S corporations
• Alimony you receive
• Prizes you win

Taxes you expect to owe on these kinds of income must have estimated payments to the IRS. You may still owe some taxes if you had some taxes withheld on this income. If the difference between what you expect to owe and the amount withheld equals $1,000 or more, making estimated payments is necessary.

Why Should You Apply Your Refund to Your IRS Estimated Tax Payment?

Although applying your refund to your IRS estimated tax payment is required, you might want to if you owe a first-quarter estimated tax payment. 

If the income you’re going to have is not subject to withholding and you know about it such as self-employment income, investment income, and some retirement income, for a given year, must make estimated tax payments to remain in good standing with the Internal Revenue Service. You probably already this but just in case you don’t, underpayment on your estimated taxes can lead to a costly underpayment penalty.

Estimated Tax Penalty

Let’s further discuss the penalty you may incur if you happen to underpay taxes through withholding and estimated tax payments. In addition to this, a penalty for late tax payments is also possible even if you are due a refund when you file your tax return.

The IRS can charge you an estimated tax penalty if you didn’t pay enough taxes during the year by withholding taxes from your pay check or by making estimated tax payments. Since by law, it is a requirement for taxpayers to pay taxes as you receive income for the whole year, the IRS charges estimated tax penalties.

You may be able to avoid the penalty if:

• Less than $1,000 in taxes is owed or,
• At least 90% of the tax you owe for the current year was paid or you paid 100% of the tax you owed for the previous year (whichever is less).

When you file your tax return with IRS Form 2210, you may be able to lessen estimated tax penalties. By applying one of the many IRS rules, this form will allow you to provide an exception or reduce the amount of the penalty. It may also be a good idea to adjust your withholding or make estimated tax payments in the future. The IRS can abate estimated taxes penalties in rare circumstances of financial hardship.

Now back to applying tax refund to next years estimated taxes, you essentially give yourself a head start on your payments for the 2019 tax year if you apply your refund to your estimated taxes. If you’re not sure whether you want to use all of this year’s refund for next year’s estimated tax, you have the option to apply only part of your refund to your IRS estimated tax payment. Remember our tip: apply a portion your refund to next year’s first-quarter estimated tax payment which is due April 15 if you pay quarterly estimated taxes. This will help you avoid underpayment penalties on next year’s return. 

Do you have more questions about estimated taxes, tax refund, penalties, and other tax-related matters? You may visit the IRS website or consult a tax professional who is experienced in taxes and have dealt with taxpayers before to help resolve their tax problems.