When the COVID-19 outbreak exploded back in March, filing taxes was the furthest thing on most people's minds. Recognizing that, the IRS made a smart decision: It postponed the April 15 tax-filing deadline to July 15, giving taxpayers an extra three months to not only get their returns in order, but come up with any money they owed for the 2019 tax year.
The IRS's move was a generous one in theory, except for one thing: Because so many Americans took advantage of that extra time and filed their tax returns much later than usual, they also delayed their tax refunds at a time when that money would've been helpful. Millions of Americans became unemployed in the course of the COVID-19 pandemic and subsequent recession it spurred, and so waiting three months longer for a tax refund put some filers in a very tight spot.
If you waited longer than usual to collect your tax refund this year because you took advantage of the later filing deadline, here's some good news: The IRS is paying interest on refunds, which means you may be entitled to an extra check. In fact, it's estimated that close to 14 million filers will receive a separate payment from the IRS for interest on their refunds this year. But while extra money is always nice, you shouldn't get too excited about that interest payment just yet.
A mixed bag
On one hand, it's nice that the IRS is letting tax-filers collect interest on refunds issued after April 15. But you may not end up getting all that much money out of the deal.
The average tax refund issued this year was $2,741 as of July 24, reports the IRS. And the average interest payment on that refund amounts to about $18.
Granted, at a time when so many people are struggling financially, an extra $18 is better than nothing. And of course if your refund was significantly higher, then so too will you be entitled to a more generous interest payment. But another thing you should know is that your interest payments will be subject to taxes when you file next year's return. That may seem ridiculous, but those interest payments are considered income in the eyes of the IRS, and so if you receive a 1099 form summarizing your interest payment, don't toss it out in the trash -- you'll need it when you file taxes in 2021.
Finally, if you received a large refund on your 2019 taxes, and your income this year is comparable, it could pay to adjust your withholding for the rest of 2020 to get more money in your paychecks. This especially holds true if you're dealing with financial problems due to the ongoing pandemic. When you collect a large tax refund, it normally means you've given the government an interest-free loan with nothing in return, and if you could use the extra money right now, there's no reason to wait until you file your 2020 taxes next year to get it.