How to calculate your interest
The interest is an annual rate compounded daily, meaning you divide the 6 percent rate by 365, explained Tommy Lucas, a certified financial planner and enrolled agent at Moisand Fitzgerald Tamayo in Orlando, Florida.
With the average brick and mortar savings account paying well below 1%, the interest of the IRS may seem attractive. However, it remains lower than annual inflation, which grew by 8.5% in July.
And with the average 2021 tax refund to over $3,000many applicants would prefer to have their payment on time, Lucas said.
For perspective, in 2020, the the IRS reported that the average refund interest check on 2019 federal returns was $18. Interest rates at that time were 5% during the second quarter and 3% during the third.
“It’s taxable, so be prepared to report it”
While the interest may offer some comfort, there’s a downside: “It’s taxable, so be prepared to report it,” Lucas said.
If you are paid interest on a late repayment, you can expect to receive Model 1099-INT from the IRS, which must be included on your tax return, he said.
It’s taxable, so be prepared to report it.
Tommy Lucas
financial advisor to Moisand Fitzgerald Tamayo
“If it doesn’t cross, they’ll flag it and your return will be delayed,” Lucas said. “Don’t forget this interest because they will expect you to include it Schedule B.”
He said late tax returns and late interest payments speak to the importance of filing an error-free return to avoid processing delays.
As of August 5, there were 9.7 million 2021 individual tax returns unprocessed, according to the IRSwith 1.8 million requiring “error correction or other special treatment.”
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