Yes, interest the IRS pays you on a tax refund is taxable income, and you report it on your next tax return

When the IRS holds your money longer than it should—usually because you overpaid taxes or filed an amended return—it pays you interest on that refund. That interest is taxable income in the year you receive it. The IRS sends you a Form 1099-INT showing the amount, and you report it on your next return as interest income.

The rate changes quarterly. For 2024, the IRS paid interest at 8% per year on overpayments. The rate was lower in previous years—3% in 2022, for example. Even small amounts of interest are taxable; there is no minimum threshold.

This matters most if you are on a tight budget or already owe taxes for the year you receive the refund interest. A $500 refund that sits for two years might earn $80 in interest, and that $80 gets added to your taxable income for the year you receive the check.

Key Takeaways

  • The IRS sends Form 1099-INT for all refund interest, and you must report it as income on Schedule 1 of your tax return.
  • Interest rates are set by the IRS each quarter and have ranged from 3% to 8% in recent years, depending on the federal rate.
  • Refund interest is taxable in the year you receive the payment, not in the year the original refund was issued.
  • If you do not receive a Form 1099-INT but the IRS paid you interest, contact the IRS to request a corrected form or report the interest yourself.

How the IRS calculates and pays refund interest

The IRS calculates interest daily from the date it should have issued your refund to the date it actually sends you the money. The calculation runs at the federal short-term rate plus 3 percentage points. This rate resets every three months, so a refund delayed across multiple quarters earns interest at different rates for different periods.

You do not have to do anything to receive the interest—the IRS adds it to your refund check automatically. If you are owed $1,000 and the IRS held it for six months, the check might be $1,040 (the extra $40 being interest). The interest arrives in the same payment as the refund itself.

The IRS does not pay interest on refunds issued within 45 days of the return due date or the date you filed, whichever is later. Most refunds issued within that window carry no interest. Interest accrues only on delays beyond that 45-day window.

Where refund interest appears on your tax forms

The IRS reports refund interest on Form 1099-INT, which you receive by mail or electronically if you set up IRS e-services. The form shows the interest amount in Box 1 (Interest Income). You will receive this form only if the interest is $10 or more, though you must report smaller amounts if you received them.

You report the interest on Schedule 1 (Form 1040), Part I, Line 8 (Interest). This is straightforward—you straightforward enter the amount from the 1099-INT. The interest then flows into your total income and is taxed at your ordinary income tax rate.

If you received interest but did not get a 1099-INT, you can still report it. Call the IRS at 800-829-1040 and ask for a corrected form, or straightforward report the interest yourself on Schedule 1 with a note explaining that you did not receive the form.

When refund interest pushes you into a higher tax bracket

For most people, refund interest is a small amount—$50 to $200—and does not meaningfully change their tax bill. But if your refund was large or delayed for years, the interest can be substantial enough to matter.

Imagine you filed an amended return claiming a $5,000 refund. The IRS took 18 months to process it and paid you $5,400 (including $400 in interest). That $400 is now taxable income in the year you receive the check. If you are already close to the edge of a tax bracket, that interest could push you over and increase your tax rate on a portion of your income.

This is rare, but it happens most often to people who receive large refunds from amended returns or who had significant delays in processing. You cannot avoid the tax on the interest, but you can factor it into your planning if you know a large refund is coming.

Refund interest versus penalties and other IRS payments

Refund interest is different from other money the IRS might send you. If the IRS pays you interest because you underpaid estimated taxes or owed a penalty that was later waived, that is a different situation and may not be taxable in the same way.

The rule is straightforward: interest the IRS pays you on your overpayment (money you gave the government that it should have returned sooner) is taxable. Interest the IRS pays you as a correction to an error on their side—such as interest on a penalty they wrongly assessed—may have different treatment. When in doubt, report it as income unless the IRS specifically tells you otherwise on the form itself.

What to do if you owe taxes for the year you receive refund interest

If you receive a refund with interest in a year when you also owe taxes, the interest adds to your tax bill. You cannot use the refund interest to offset taxes you owe for that same year—it is just additional income that increases what you owe.

For example: You receive a $2,000 refund from 2022 (plus $150 interest) in 2024. In 2024, you also owe $500 in taxes. The $150 interest is taxable income in 2024, which may increase your 2024 tax bill by $30 to $50 depending on your bracket. You still owe the original $500 separately.

If you are concerned about this, you can plan ahead. When you know a refund with interest is coming, set aside money to cover the tax on that interest. For most people, the tax on refund interest is 10% to 24% of the interest amount, depending on their tax bracket.

How to report refund interest if you did not receive a 1099-INT

The IRS is required to send a 1099-INT for interest of $10 or more. If you received interest but no form, first check your IRS online account at irs.gov. The interest may be listed there even if the paper form has not arrived.

If it is not there, contact the IRS at 800-829-1040 and provide your refund details. Ask them to issue a corrected 1099-INT or confirm the amount so you can report it yourself. You can report the interest on Schedule 1 even without the form—just note on your return that you did not receive the 1099-INT.

Keep records of your refund check or direct deposit confirmation showing the interest amount. If the IRS later questions why you reported interest, you will have proof of what you received.

Frequently Asked Questions

Can I deduct the tax I pay on refund interest?

No. Refund interest is ordinary income, and you pay tax on it at your regular rate. You cannot deduct it as a loss or offset it against other income. The only way to reduce the tax impact is to have lower overall income in the year you receive the interest.

What if the IRS paid me interest on a refund I never requested?

The interest is still taxable. The IRS pays interest automatically on delayed refunds, whether you asked for it or not. You must report it as income on your next return. You cannot refuse the interest or ask the IRS not to pay it.

Do I report refund interest differently if I received it as a direct deposit versus a check?

No. The reporting is the same regardless of how you received the money. The IRS sends a 1099-INT either way, and you report the interest on Schedule 1 in both cases.

If I received refund interest in 2023 but did not report it, can I amend my 2023 return?

Yes. File an amended 2023 return (Form 1040-X) and report the interest on Schedule 1. You may owe additional tax plus interest on the unpaid amount, but amending is better than leaving it unreported. The IRS may catch it when they match your 1099-INT to your return.

Is refund interest taxable if I am a dependent on someone else's return?

Yes. Even if you are claimed as a dependent, refund interest you receive is your taxable income. You report it on your own return. Your parent or guardian cannot claim it as their income.