Applying refund to next year

I have done that, many years ago and it left me very uneasy.

Why? Well, when I owe additional tax, my cancelled check is proof to me that the IRS received my forms and payment. If I am due a refund, the IRS's check (or direct deposit) to me is proof that they received my tax forms. If I ask for a refund to be applied to next years tax, I receive no conformation what-so-ever that they even received my tax forms. Come next year, I file my taxes assuming they applied my refund and file it. If something went wrong with the first refund and it didn't get properly applied to next years taxes it will take much more effort to fix last years problem than it would have taken to simply have had the refund sent to me so I know I received it. That way I never have this years taxes depending on what happened last year.

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-Ernie-

2006 tax liability = $10,000 2006 payments = $12,000 2006 overpayment = $2,000 (credit elected to 2007)

2007 tax liability = $11,000

2007 payments = $14,000 ($12,000 withholding + $2,000 credit elect from 2006) 2007 overpayment = $3,000

You would be entitled to a refund of the $3,000, or you can elect to have some or all of it credit elected to 2008. Frederick Lorca

Mathematically, that is correct. However, consider what you are doing with your money. First, you "earned" a refund for

2006 by having too much money withheld and given to the Treasury to hold (at no interest). Now, you want to let them continue to hold your money while also continue to be overwithheld for TY 2007, creating an even bigger refund next year. Remember, the Treasury does not pay interest on these overpaid funds. Financially, you would be just as well off taking the refund and stashing the money in your mattress! If you apply this year's refund to next year, then you should REDUCE your withholding during the year, so that you neither owe or get a large refund next year. That would give you more in your weekly/ monthly paycheck all through the year.

Mathematically, that is correct. However, consider what you are doing with your money. First, you "earned" a refund for

2006 by having too much money withheld and given to the Treasury to hold (at no interest). Now, you want to let them continue to hold your money while also continue to be overwithheld for TY 2007, creating an even bigger refund next year. Remember, the Treasury does not pay interest on these overpaid funds. Financially, you would be just as well off taking the refund and stashing the money in your mattress! If you apply this year's refund to next year, then you should REDUCE your withholding during the year, so that you neither owe or get a large refund next year. That would give you more in your weekly/ monthly paycheck all through the year.

It's not that complicated. This year's refund is simply included in the "Taxes paid" part of your 2007 return, just like the witholding and estimated tax payments you make this year. If your taxes paid are greater than the total tax you get a refund, if they're lower then you owe (and if they're too much lower, and you don't meet the safe harbor rule, you also owe a penalty).

-- Barry Margolin, snipped-for-privacy@alum.mit.edu Arlington, MA

*** PLEASE don't copy me on replies, I'll read them in the group ***

In general, the advice given is correct for the general situation. There are a couple of places where foregoing the use of the money may be a superior strategy. If you anticipate a large one-time income boost next year, leaving the money with the IRS may be a safer choice. The best example is perhaps exercise of company stock issues which leave a profit which must be declared as ordinary income. Depending upon the rest of your financial situation

-- and this is really somewhere that you should seek professional advice, rather than relying on general comments from a newsgroup -- this may or may not be an appropriate option. If you anticipate about the same level of income next year, and you expect that your withholding will once again exceed your final tax liability, then the advice given elsewhere in this thread is probably completely appropriate. Hank Murphy speaking only for myself

This problem can be avoided by asking to have most of the overpayment credit elected and small part, perhaps $50 or $100, refunded. Your receipt of the refund is an implied acknowledgement that the rest of the overpayment was credit elected. Frederick Lorca