Interest on a refund is taxable income, but only if it exceeds $1
Yes, interest the IRS pays you on a delayed refund counts as taxable income. The IRS calls this refund interest, and it happens when the government takes longer than 45 days to send your money back. You will receive a Form 1099-INT in the mail if the interest amount reaches $1 or more, and you must report it on your next tax return.
The key point: you owe tax on the interest itself, not on the original refund. The refund amount stays tax-free — only the interest portion is new income that the IRS wants to know about.
Key Takeaways
- The IRS pays interest on refunds delayed beyond 45 days, and that interest is taxable income you must report.
- You will receive a Form 1099-INT if the interest reaches $1 or more, showing the exact amount to report.
- The interest rate changes quarterly and is set by federal law, not by the IRS.
- Interest on a refund is reported on Schedule B (Form 1040) as ordinary interest income, not on a separate line.
How the IRS calculates interest on your refund
The IRS begins counting interest 45 days after you file your return or after the return's due date, whichever is later. If your refund arrives before day 45, you receive no interest. If it arrives after day 45, the IRS pays interest from day 46 until the day the check clears your bank.
The interest rate itself is set by Congress and changes every three months. The rate for the current quarter is published on the IRS website, but you do not need to calculate it yourself — the IRS does this work and tells you the amount on your Form 1099-INT. The rate has varied from less than 1% to over 8% depending on the year and quarter.
For example, if your refund was delayed 90 days and the quarterly rate was 8%, the IRS would calculate the interest owed for those 45 days of delay and add it to your refund check. That interest amount appears on Form 1099-INT.
When you receive Form 1099-INT and what it means
The IRS mails Form 1099-INT to you if the interest on your refund reaches $1 or more. You will receive it by January 31 of the year after the interest was paid. The form shows the interest amount in Box 1 (interest income) and your Social Security number or tax ID.
You must keep this form with your tax records. When you file your next return, you report the interest amount on Schedule B (Form 1040), which is where you list all interest income. The IRS also receives a copy of your 1099-INT, so they will be checking that you reported it.
If you do not receive a 1099-INT but believe the IRS paid you interest, contact the IRS at 800-829-1040 to request a copy or to verify the amount.
How to report refund interest on your tax return
When you file your next tax return, you will report the interest on Schedule B of Form 1040. Schedule B is a worksheet where you list all sources of interest income — savings accounts, bonds, CDs, and refund interest all go here.
You add up all the interest income from all your sources and enter the total on line 1b of Form 1040. This amount is then included in your adjusted gross income (AGI), which means it may affect other parts of your return, such as whether you owe tax on Social Security benefits or whether you may have access to for certain deductions.
The process is straightforward: match the amount on your 1099-INT to the amount you enter on Schedule B. If you use tax software, it will often prompt you to enter this information, and the software will place it in the correct location automatically.
Why the IRS pays interest on delayed refunds
Congress requires the IRS to pay interest on refunds that are delayed beyond 45 days. The rule exists because the government is holding your money longer than the law allows, and interest compensates you for that delay. It is similar to how a bank pays you interest on a savings account — the institution holding your money owes you something for the use of it.
The 45-day clock starts from the later of two dates: the date you file your return or the return's official due date (usually April 15). If you file in February and the IRS processes your return by late March, you receive no interest. If processing takes until June, you receive interest for the days between day 45 and the day your refund clears.
What happens if you disagree with the interest amount
If you believe the IRS calculated the interest incorrectly, you can contact them to request a review. Call 800-829-1040 or visit your local IRS office with your refund check, Form 1099-INT, and any documentation of when the refund was received.
Errors are rare because the calculation is automatic, but they do happen — for instance, if the IRS shows an incorrect refund date or if the interest rate used was wrong for that quarter. The IRS will recalculate if you provide evidence of the error, and they will issue an amended 1099-INT if needed.
How refund interest affects your overall tax situation
Because refund interest is added to your income, it may push you into a higher tax bracket or affect your may be able to access for certain tax credits. For most people, the interest amount is small enough that this does not matter. However, if your refund was very large and delayed for many months, the interest could be substantial.
For example, if you received $5,000 in interest on a delayed refund, that $5,000 is now taxable income. Depending on your tax bracket, you might owe $750 to $2,000 in tax on that interest alone. This is one reason to avoid overpaying taxes in the first place — the interest the IRS pays is usually lower than what you could earn elsewhere, and you lose the use of your money for months.
Frequently Asked Questions
Do I have to pay tax on the interest if it is less than $1?
No. The IRS only sends a Form 1099-INT if the interest reaches $1 or more. If your interest is $0.50, you do not report it. However, if you receive multiple refunds with interest that adds up to $1 or more across all of them, you will receive a 1099-INT showing the total.
What if I lost my Form 1099-INT?
Contact the IRS at 800-829-1040 and request a duplicate. You can also access your account through IRS.gov and view the interest amount there. You must still report the interest on your return even if you do not have the physical form.
Can I deduct the tax I owe on refund interest?
No. Refund interest is ordinary income, and you cannot deduct it. You report it as income and pay tax on it at your normal rate. There is no offsetting deduction available.
Why did my refund take so long if the IRS is supposed to process returns in 21 days?
The 21-day timeframe is a goal, not a may provide. Refunds are delayed for many reasons: missing information on the return, identity verification requirements, errors that need correction, or straightforward high volume during tax season. If your refund was delayed, the interest compensates you for the wait.
Is refund interest the same as the interest rate the IRS charges on unpaid taxes?
No. The IRS pays interest on refunds at one rate (set quarterly by Congress) and charges interest on unpaid taxes at a different, usually higher rate. The rates are separate and change independently.