Interest on your tax refund is taxable income, and the IRS will report it to you on Form 1099-INT

Yes, interest paid by the IRS on a delayed refund counts as taxable income. The IRS calculates interest when it takes longer than 45 days to issue your refund. That interest is real money the government owes you for the time it held your funds, and the IRS treats it the same way it treats interest from a bank account or savings bond — as income you must report.

The IRS will send you Form 1099-INT in January or February of the following year if you received refund interest. This form shows the exact amount in Box 1 (Interest Income). You report this amount on your tax return for that year, typically on Schedule 1 (Form 1040) under "Interest" or directly on Form 1040 depending on the total amount and your filing status.

The interest rate the IRS pays varies by quarter and is set by federal law. For 2024, the rate has ranged from 8% to 9% depending on the quarter. Even small amounts of refund interest must be reported — there is no minimum threshold that exempts you.

Key Takeaways

  • Refund interest becomes taxable income in the year you receive it, not the year you filed your original return.
  • The IRS sends Form 1099-INT to report refund interest, and you must include it when you file your next tax return.
  • The interest rate changes quarterly and is set by federal statute, not by the IRS's choice.
  • If you received a refund with interest but did not receive Form 1099-INT, contact the IRS at 800-829-1040 to request a corrected copy.

How the IRS calculates and pays refund interest

The IRS pays interest starting on the 46th day after you file your return or the return's due date, whichever is later. If you file on March 15 and the IRS issues your refund on June 1, you receive interest for the days between day 46 and the issue date.

The interest rate is recalculated each quarter. The IRS publishes the current rate on its website and in the Federal Register. The rate for the first quarter of 2024 was 8%, the second quarter was 8%, the third quarter was 9%, and the fourth quarter was 9%. These rates explore to both refunds owed to taxpayers and taxes owed by taxpayers, though the rates can differ.

The IRS compounds the interest daily, meaning interest accrues on interest. For a refund delayed several months, this compounds to a meaningful amount. A $5,000 refund delayed 120 days at 8% annual interest would generate roughly $131 in interest.

When you receive the Form 1099-INT and what to do with it

The IRS mails Form 1099-INT in late January or early February for interest paid during the previous calendar year. If your refund was issued in December 2024, you would receive the 1099-INT in January 2025, and you would report that interest on your 2024 tax return (filed in 2025).

Check the form carefully. Box 1 should show the interest amount. Box 5a shows the U.S. Savings Bond interest, which is separate. Make sure the amount matches what you expected based on your refund amount and the delay.

If you do not receive a 1099-INT but you know you received refund interest, call the IRS at 800-829-1040 and provide your Social Security number and the year in question. The IRS can issue a corrected form or confirm whether one was mailed to an outdated address.

How refund interest affects your tax liability

Refund interest is added to your other income for the year you receive it. If you are in the 12% tax bracket, that interest is taxed at 12%. If you are in the 22% bracket, it is taxed at 22%. The interest itself does not push you into a higher bracket unless your total income crosses a threshold.

For most people, the tax owed on refund interest is small. A $100 refund interest payment at a 12% rate costs $12 in additional tax. However, if you received a very large refund with a long delay, the interest can be substantial, and the tax on it will be too.

You cannot deduct refund interest as a loss or offset it against other income. It is straightforward added to your taxable income for that year.

Refund interest and state taxes

Most states also tax refund interest as income, though the rules vary. Some states follow the federal treatment exactly. Others have different interest rates or different thresholds for when interest begins to accrue. A few states do not tax refund interest at all.

If you live in a state with an income tax, check your state's rules or contact your state tax authority. The state will typically send you a separate form (often called a 1099-INT equivalent) if you owe state tax on refund interest. Some states include the federal 1099-INT amount automatically in their calculations.

Why the IRS pays interest and how to avoid it

The IRS is required by law to pay interest on refunds delayed beyond 45 days. This is meant to compensate you for the time the government held your money. The interest rate is set by statute and changes quarterly based on the federal short-term rate.

You cannot opt out of receiving refund interest, and you cannot avoid the tax on it. However, you can reduce the likelihood of a delayed refund by filing electronically, using direct deposit, and ensuring your return is complete and accurate before submission. Incomplete returns, missing documentation, or errors trigger manual review, which delays processing.

If you are owed a refund and you need the money quickly, filing early in the tax season (January or early February) increases the chance of faster processing, though the IRS does not may provide a timeline.

What to do if you disagree with the interest amount

If the 1099-INT shows an interest amount you believe is incorrect, first verify the refund date on your own records. Check your bank deposit date or the IRS transcript (available free at irs.gov under "Get Your Tax Record"). The interest calculation depends on the exact date the IRS issued the refund.

If the date on the 1099-INT does not match your records, call the IRS at 800-829-1040 with your Social Security number, the year, and the refund amount. The IRS can review the calculation and issue a corrected form if an error occurred.

Mathematical errors in interest calculation are rare but do happen. The IRS uses automated systems to calculate interest, and errors usually surface only when the refund date or amount was recorded incorrectly in the system.

Frequently Asked Questions

Do I have to report refund interest if the amount is very small?

Yes. There is no minimum threshold. Even $1 in refund interest must be reported on your tax return. If you receive a 1099-INT, the amount is already in the IRS system, and omitting it from your return will likely trigger a mismatch notice.

What if I received my refund in one year but the interest was paid in the next year?

You report the interest in the year you received it, not the year you filed the original return. If your 2023 refund was issued in January 2024 with interest, you report that interest on your 2024 tax return.

Can I claim the tax I pay on refund interest as a deduction?

No. Refund interest is income, and the tax you owe on it is straightforward part of your total tax liability. You cannot deduct it separately or treat it as a loss.

Why did my refund take so long that I earned interest?

Common reasons include incomplete returns, missing documentation, identity verification delays, errors that required correction, or straightforward high filing volume early in the tax season. The IRS begins paying interest after 45 days regardless of the reason for the delay.

If I owe taxes next year, can I use refund interest to offset them?

No. Refund interest is reported as income on the year you receive it. If you owe taxes in a different year, you would need to file an amended return or make a separate payment. The two are not automatically offset.