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Assuming USA federal taxes...

  • 2017 - I prepay estimated taxes of $1,000 on 1st of each month (total: $12,000).
  • 2018 - Jan, Feb, Mar, Apr, I prepay $1,000 on 1st of each month (total: $4,000).
  • 2018-Apr-15 - Taxes come to an owed balance of $13,000.

Will IRS deduct $13,000 from the total balance of $16,000, leaving $3,000 for 2018, or is the 2018 prepay of $4,000 special (in some way) and must only apply to the 2018 tax year?

I would imagine that the IRS has a single "bucket" for any/all payments that come in that is used each time an amount is owed.

The reason this all seems strange to me, is when/how is a tax refund issued? If there's simply one bucket, then how does IRS know not to refund the $3,000 which was intended as prepay for 2018?

(Followup: Do federal and state handle this the same way?)

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If you are paying taxes in through the year (presumably because you are not having taxes—or sufficient taxes—withheld by an employer), you typically pay four times a year, not twelve, in mid-April, mid-June, mid-September, and mid-January, assuming your fiscal year is the calendar year.

Those four payments are for the tax year during which all but the January payment fall, and are typically identified as such. If you are paying with paper checks, for example, you will mail them in with the appropriate voucher from a form 1040-ES, and (following instructions) you will write on the check "2017 Form 1040-ES" to identify the purpose of the payment (estimated taxes) and the tax year to which the payment applies.

In April of 2018, you would file the full 1040 (or simpler variety) to figure your final tax liability for the prior tax year, and either pay the remaining balance, or request a refund. In addition, you would submit the first quarterly payment for your 2018 1040-ES, if you continue to need to pay quarterly taxes.

On your full 1040, you also have the option of applying any overpayment to the next year's estimated taxes, instead of receiving it as a refund. Again, in this case, it is a refund for the past year explicitly being applied to the coming year's estimated taxes, just as with the 1040-ES payments you might make.

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    To be perfectly complete and answer the OP's side question about how the IRS knows if a refund amount is prepay for the next year: line 77 of Form 1040 allows the taxpayer to designate part or all of the refund amount as to apply to the next year tax.
    – user662852
    Oct 24, 2017 at 18:58
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    So I'm hearing that it's a specific option on the tax form to designate whether to receive the balance as a refund, or leave it as prepay for the next tax year. Are state taxes generally the same way?
    – AAron
    Oct 24, 2017 at 19:28
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Short answer: When you make any sort of payment to the IRS, you designate what tax year it is for, either by writing a year in on the appropriate blank on a form, or because the year is printed at the top of the form. They don't guess. Sometimes you have a choice. For example, if you make a deposit to your IRA between January 1 and the date you file your taxes for the year, you have the choice whether this applies to the previous tax year or the current tax year. You have to tell them.

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  • Jay, thanks for the short succinct answer further clarifying the point.
    – AAron
    Oct 26, 2017 at 3:10

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