Interest on your tax refund is taxable income, and you'll report it on your next tax return

When the IRS holds your money longer than it should, they pay you interest on the refund. That interest is taxable. You report it as income on your next federal tax return, usually on Form 1040 or in the interest income section of whatever form you file. The IRS sends you a Form 1099-INT in January or February if the interest you received was $10 or more in the previous year.

The amount is usually small — often just a few dollars — but it still counts as income. This applies whether you received the interest as part of your refund check or as a separate payment.

State tax treatment varies. Some states tax the interest the same way the federal government does. Others do not tax it at all. Check your state's tax authority website or your state tax form instructions to see how your state handles refund interest.

Key Takeaways

  • Interest paid by the IRS on a delayed refund is taxable federal income and must be reported on your next tax return.
  • The IRS sends Form 1099-INT if your interest was $10 or more, but you report the interest even if you don't receive the form.
  • State tax treatment of refund interest varies — some states tax it, others do not, so check your state's rules.
  • The interest rate the IRS pays changes quarterly and is usually between 6 and 8 percent, though it can be lower or higher depending on the quarter.

When the IRS pays interest on your refund

The IRS pays interest when they issue your refund more than 45 days after the later of two dates: the date you filed your return or the date your return was due (usually April 15). If you file on time and the IRS processes your refund within 45 days, you get no interest. If processing takes longer, the clock starts running.

Interest accrues from the due date of your return (or the date you filed, if later) until the IRS issues the refund. So if you filed in February and received your refund in July, interest covers the months in between.

The interest rate changes every three months. The IRS publishes the current rate on their website. As of recent years, the rate has ranged from about 6 to 8 percent annually, though it can be lower or higher depending on economic conditions and the quarter.

How to learn about you received interest

Check your refund check or deposit confirmation. If the IRS paid interest, it will show as a separate line item or as part of the total refund amount. Your bank or check cashing service may also show it separately.

The clearest way to know is to wait for Form 1099-INT. The IRS mails this form in January or February if you received $10 or more in interest during the previous year. The form shows the interest amount in Box 1.

If you don't receive a Form 1099-INT but believe you received interest, contact the IRS at 800-829-1040 or check your account on IRS.gov using your login credentials. You can also look up your refund status and see the exact amount issued.

Reporting refund interest on your tax return

Report the interest on Schedule 1 (Form 1040), line 8b, labeled "Interest." If you file a simpler return that doesn't use Schedule 1, enter it on the interest income line of your main form. The exact location depends on which form you file.

You report the interest even if you don't receive Form 1099-INT. The IRS has a record of the interest they paid, and your tax software or preparer will ask about interest income when you file. If you received the form, enter the amount shown in Box 1.

The interest is added to your other income for the year, which may affect your tax bracket or your may be able to access for certain tax credits. In most cases, the amount is small enough that it makes little difference, but it still must be reported.

State tax treatment of refund interest

Federal and state tax treatment are separate. Some states follow federal rules and tax refund interest as income. Others do not tax it at all. A few states have middle-ground rules — for example, taxing it only if it exceeds a certain amount.

Check your state's tax form instructions or visit your state tax authority's website. Search for "refund interest" or "interest income" on the site. If you file a state return, your tax software will usually ask about interest income and apply your state's rules automatically.

If you live in a state with no income tax (such as Texas, Florida, or Wyoming), this is not a concern. If you live in a state with income tax but moved during the year, check the rules for the state where you lived when you filed your federal return.

What happens if you don't report the interest

The IRS has a record of the interest they paid you. If you don't report it, the IRS will notice the discrepancy when they match your return against their records. This can trigger a notice or a correction to your return.

In most cases, the amount is small enough that the IRS may simply adjust your return and send you a bill for the small amount of tax owed on the interest, plus any penalties or interest on that amount. Intentionally hiding income can lead to larger penalties, but forgetting to report a small amount of refund interest is usually treated as an honest mistake.

The safest approach is to report it. It takes one line on your return and prevents any future correspondence with the IRS about the missing income.

How refund interest affects your tax situation

The interest is added to your taxable income for the year. If you're close to a tax bracket threshold or the income limit for a credit (such as the Earned Income Tax Credit or Child Tax Credit), the interest could push you over the edge and reduce your benefit.

In most years, the interest amount is small — often $5 to $50 — so the impact is minimal. But if your refund was very large or delayed for many months, the interest could be several hundred dollars, which might affect your tax situation more noticeably.

If you're concerned about how the interest will affect your taxes, mention it to your tax preparer or enter it into your tax software and see the impact before you file. Most of the time, the effect is negligible.

Frequently Asked Questions

Do I have to report refund interest if it's less than $10?

Yes. The IRS only sends Form 1099-INT if the interest is $10 or more, but you still report any interest you received, no matter how small. Check your refund documentation or IRS account to see the exact amount.

Can I deduct the interest the IRS paid me?

No. Refund interest is income, not a deduction. You report it as interest income on your tax return. You cannot deduct it or offset it against other income.

What if the IRS made a mistake and overpaid the interest?

Contact the IRS at 800-829-1040 and explain the situation. They will investigate and correct the amount if needed. Report only the correct amount on your tax return.

Does refund interest count toward the standard deduction?

No. The standard deduction is a fixed amount that does not change based on your income. Refund interest is added to your taxable income, but it does not affect your standard deduction.

If I received refund interest, does that mean I overpaid my taxes?

Yes, receiving interest means the IRS held your money longer than 45 days, which usually happens because you overpaid your taxes during the year. The interest is compensation for the time they held your money, but it does not change the fact that you overpaid.