Interest on state refunds is taxable income, and you report it on your federal return
When a state holds your tax refund and pays you interest for the delay, that interest becomes taxable income on your federal tax return. The state reports it to you on a Form 1099-INT (or sometimes a 1099-MISC), and you enter it on Schedule 1 (Form 1040) under "Interest" or "Other income," depending on the form the state used.
This applies even though the interest came from your own money sitting in a state account. The IRS treats it the same way it treats interest from a savings account or a bond—as income you earned during the tax year, regardless of where it came from.
The amount varies widely. Some states pay interest only if the refund is delayed past a certain number of days (often 45 to 90 days). Other states do not pay interest at all. A few states pay interest automatically on all refunds held past a threshold date. The rate is usually set by state law and changes annually—it might be 0.5% or it might be 8%, depending on the state and the year.
Key Takeaways
- Interest paid by a state on a delayed refund is taxable federal income and must be reported on your Form 1040.
- The state will send you a Form 1099-INT or 1099-MISC showing the interest amount, usually by January 31 of the following year.
- You enter the interest amount on Schedule 1 (Form 1040) under the appropriate income line.
- Interest rates and payment rules vary by state—some states pay interest automatically, others only if you request it, and some do not pay interest at all.
How states report interest to you and the IRS
The state revenue department sends you a Form 1099-INT if the interest is substantial enough to report (the threshold varies by state, but is often $10 or more). If the state uses a different form, it will be a 1099-MISC with the interest listed in Box 3.
You receive this form by January 31 of the year after the interest was paid. The state also sends a copy to the IRS, so the IRS knows about the income whether you report it or not. If you do not report it and the IRS matches the 1099 to your return, you may receive a notice of underreported income.
Keep the 1099 with your tax records. You will need it to complete your return accurately, and you may need it if the IRS ever asks about that year's income.
Where to report interest on your federal tax return
On Form 1040, you report the interest on Schedule 1. Look for the line labeled "Interest" (usually line 8a or 8b, depending on the year). Enter the amount from your 1099-INT there.
If the state sent a 1099-MISC instead, the interest may go on a different line—check the instructions for that specific year's Schedule 1, or ask a tax preparer. The location can shift slightly from year to year.
This income is added to your other income and may affect your tax bracket, your standard deduction (if you are a dependent), or your may be able to access for certain credits. It is not a separate tax; it is straightforward part of your total taxable income for the year.
When a state does not pay interest
Many states do not pay interest on refunds at all, even if the refund is delayed for months. In those cases, you receive no 1099 and have nothing to report. The refund itself is not taxable (you already paid tax on that income when you earned it), but any interest the state does pay is.
A few states pay interest only if you request it in writing or meet specific conditions. Check your state revenue department's website or call to find out whether your state pays interest, at what rate, and whether you need to do anything to receive it.
Interest on federal refunds versus state refunds
Interest paid by the IRS on a delayed federal refund is also taxable, and the IRS reports it on a Form 1099-INT. You report it the same way—on Schedule 1 of your Form 1040. The rules are identical.
The IRS pays interest if your refund is delayed more than 45 days from the date you filed or the date the return was due, whichever is later. The rate is set quarterly and is tied to the federal short-term rate. For recent years, it has ranged from less than 1% to around 8%.
If you received both a state refund with interest and a federal refund with interest in the same year, you will receive two separate 1099-INT forms (one from each), and you add both amounts to your Schedule 1.
How interest affects your tax liability
The interest is added to your income, which may push you into a higher tax bracket or reduce certain tax credits. The impact depends on your total income for the year and your filing status.
For most people, the amount of interest is small—often under $100—so the additional tax owed is minimal. But if your state refund was large and the interest rate was high, the amount could be more significant. You can estimate the impact by adding the interest to your other income and recalculating your tax using a tax table or software.
If you are a dependent, interest income can also affect whether you are required to file a return. The threshold for filing includes interest as part of your gross income.
Frequently Asked Questions
Do I have to report interest if the amount is very small?
Yes. Even if the state does not send you a 1099 because the amount is below their reporting threshold, you are still required to report all interest income on your federal return. However, most states do not send a 1099 unless the interest is $10 or more, so you will usually receive one if there is any interest at all.
What if I never received a 1099 from the state but I know I got interest?
Contact your state revenue department and ask them to issue one. If they confirm you received interest but will not issue a form, you can still report the amount on your Schedule 1 based on your records (the refund check stub, a letter from the state, or your bank deposit). Keep documentation in case the IRS asks.
Can I deduct the interest as a tax expense?
No. Interest paid on a state refund is ordinary income, not a deductible expense. You cannot offset it against other income or claim it as a loss.
Does the interest count toward my income for purposes of benefits or credits?
Yes. Interest income is counted as part of your adjusted gross income (AGI) and may affect your may be able to access for certain credits, deductions, or government benefits that have income limits. Examples include the Earned Income Tax Credit, the Child Tax Credit, and Medicaid in some states.
What if the state made a mistake and paid me interest I was not may have access to to?
You still report it as income on your federal return. If you believe the state made an error, contact the state revenue department to dispute it and ask them to issue a corrected 1099. Do not straightforward ignore the 1099 you received.