Here's what you need to know about the IRS announcement and who qualifies for the extra payment.
The IOU stems from a quirk in the tax code. By law, the IRS must issue interest payments to Americans who receive their refund checks 45 days after the typical April 15 filing date.
This year, the IRS extended the filing deadline to July 15 due to the coronavirus pandemic. Since this year's extension is considered disaster-related postponement, the IRS is required to pay interest calculated from the original April 15 filling deadline.
If you filed a 2019 return by this year's July 15 deadline and either received a tax refund after April 15 or expect a refund soon, be on the lookout for an interest payment.
Video by David Fang
By law, the interest rate on both overpayment and underpayment of tax is adjusted quarterly, according to the IRS. For the second quarter, which ended on June 30, 2020, the interest rate was 5% per year, compounded daily. For the third quarter, which ends on September 30, 2020, the interest rate is 3% per year, compounded daily.
While that's more interest than you'd earn parking your money in a savings account, don't expect a big payout. The average interest payment is about $18, according to the IRS.
Most payments will be issued as a separate amount from your tax refund. About 12 million people will have their interest payments directly deposited into the same bank account that their tax refund was deposited. Everyone else can expect to receive a paper check.
If you receive a paper check, be on the lookout for a notation saying "INT Amount." That's how you'll know it's a legit check for your refund interest payment.
Video by David Fang
Interest payments are considered taxable income, so you'll need to report any money you receive from the IRS on your 2020 federal income tax return next spring. In January 2021, the IRS will send out a Form 1099-INT to anyone whose interest payment totaled $10 or more, for easier filing.
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