Why the IRS is paying taxpayers interest

United States Treasury check and American flag. Concept of stimulus payment, tax refund and federal government grants, loans, benefits and assistance
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What's the full story on this mystery money, going to about 13.9 million individual taxpayers? It's interest owed on tax refunds, the IRS explains.

Amid the chaos caused by the COVID-19 pandemic, this year's tax filing deadline was extended from April 15 to July 15. If you filed your tax return over those three months and either already got a refund or are expecting one, you'll receive interest on your refund, too.

Officials explain that the interest is a result of the "disaster-related postponement" of this year's Tax Day, because of the coronavirus.

The law governing disaster-related delays requires the IRS to pay individuals interest on their refunds, starting from the original April 15 deadline. You get no extra cash if you got a refund before April 15 — or if you missed the extended July 15 due date.

Before you start thinking the tax agency is being unusually generous by handing out the interest, here's a fact that will snap you back to reality: "The 2019 refund interest payments are taxable, and taxpayers must report the interest on their 2020 federal income tax return," the IRS says. Harsh.

Most of the interest payments are being made separately from tax refunds. About 12 million people will receive their interest via direct deposit, and the other 1.9 million will be mailed checks, says the tax agency.

What can you do with $18? Here are some ideas

Men portrait with his few dollars left
Marco Brockmann / Shutterstock

If one of these "windfalls" lands in your lap, don't scoff. There's a lot you can do with $18 or so.

  • Get started in stocks. The stock market has been hitting all-time highs in 2020, but you might assume you need a lot of money to get a piece of that. You would be wrong. With the Robinhood app, you can start investing in stocks with as little as $1, and never have to pay any commissions or trading fees. Plus, when you sign up, you'll automatically get one free share of stock in your account, maybe from Visa, Microsoft or even Facebook.

  • Safeguard your income. You could use your interest money to make your first monthly payment on a disability insurance policy. The pandemic has demonstrated how life can be full of unwelcome surprises. One day you might find yourself unable to do your job because of a serious illness — or injury — and how would you pay your bills? Disability insurance, offered by a company like Breeze, would provide you with an income while you're sidelined, and a policy costs as little as $9 a month.

  • Protect your loved ones. If you have people who are depending on you, financially, you could take your check and buy some life insurance. Seriously. Most people think life insurance is much more expensive than it actually costs, according to the industry group LIMRA, which says a healthy 30-year-old could get a $250,000 policy for only around $13 a month. The free online service Quotacy will help you compare rates and find the best deal on life insurance in just 90 seconds.

  • Open a college fund. If you've got little ones who'll be ready for college sooner than you can ever imagine, your money from the IRS could allow you to open a 529 college savings plan. Many states offer accounts that have no minimum opening balance, but be sure to set up automatic withdrawals from your bank account to keep contributing. With 529 plans, your savings are invested, the earnings are tax-free, and often there are state tax breaks on your contributions.

  • Begin investing spare change. You might use your interest payment to start investing through Acorns, an app that lets you grow your investment fund by rounding up your debit and credit card purchases. If you spend $2.30 on coffee, the transaction is rounded to $3, and the leftover 70 cents is directed into your Acorns account.

About the Author

Doug Whiteman

Doug Whiteman

Editor-in-Chief

Doug Whiteman is the editor-in-chief of MoneyWise. He has been quoted by The Wall Street Journal, USA Today and CNBC.com and has been interviewed on Fox Business, CBS Radio and the syndicated TV show "First Business."

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