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Interest on Credits, Refunds,
Credit Transfers and Tax Due

Interest Owed

Past-due taxes are charged interest beginning sixty-one days after the due date.

For most taxes due on or after Jan. 1, 2000, this interest rate varies annually, set at one percent over the prime rate as published in the Wall Street Journal on the first business day of the year.

Calculating Interest Owed

You can calculate the interest you owe by multiplying the interest rate times the tax due times the number of days interest accrues, then dividing that total by the number of days in a year (365 days or 366 for leap years). For example, if you owe $1000 in taxes at a rate of 8.25 percent (0.0825) for 150 days in 2008 (366 days) the interest owed would be $33.81.

Year Annual Rate
Prime +1
2009 4.25 percent (.0425)
2008 8.25 percent (.0825)
2007 9.25 percent (.0925)
2006 8.25 percent (.0825)
2005 6.25 percent (.0625)
2004 5.00 percent (.0500)
2003 5.25 percent (.0525)
2002 5.75 percent (.0575)
2001 10.50 percent (.1050)
2000 9.50 percent (.0950)

For taxes due on or before Dec. 31, 1999, interest was assessed at 12 percent per year.

Interest Earned

As a result of legislation (SB 1570) passed in the 79th Regular Legislative Session, refund claims filed on or after Sept. 1, 2005, accrue credit interest at either Treasury Pool rate or Prime +1, whichever is less.

The credit interest will vary annually until the credit is refunded or transferred to a liability. The credit interest for each year is determined by that year's Treasury Pool rate or Prime +1, whichever is less.

Example: If interest accrues from Dec. 20, 2007, to Jan. 20, 2008, the interest rate from Dec. 20, 2007, to Dec. 31, 2007, will be 5.066 percent (0.05066), and the interest from Jan. 1, 2008, to Jan. 20, 2008, will be 4.764 percent (0.04764).

Calculating Interest Earned

You can calculate the interest earned by multiplying the interest rate times the tax due times the number of days interest accrues, then dividing that total by the number of days in a year (365 days or 366 for leap years). For example, if you were to earn interest on $1000 at a rate of 4.764 percent (0.04764) for 150 days in 2008 (366 days), the interest earned would be $19.52.

Year Annual Rate
Prime +1
Annual Rate
Treasury Pool
2009 4.25 percent (.0425) 4.250 percent (.04250)
2008 8.25 percent (.0825) 4.764 percent (.04764)
2007 9.25 percent (.0925) 5.066 percent (.05066)
2006 8.25 percent (.0825) 4.068 percent (.04068)
2005 6.25 percent (.0625) 2.187 percent (.02187)
2004 5.00 percent (.0500) 1.517 percent (.01517)
2003 5.25 percent (.0525) 2.107 percent (.02107)
2002 5.75 percent (.0575) 3.465 percent (.03465)
2001 10.50 percent (.1050) 6.140 percent (.06140)
2000 9.50 percent (.0950) 5.619 percent (.05619)

Credit Interest Summary

Credit Interest

Since Jan. 1, 2000, taxpayers have been able to receive interest on refunds and transfers of taxes paid in error. The interest begins to accrue 60 days after the date of the payment, or the due date of the tax report, whichever is later. Credit interest does not accrue for report periods prior to Jan. 1, 2000, or for Title 6, Property Code. Credit interest created by a payment or transfer of payment from one period to another of an eligible report period used to satisfy some, or all, of a liability is referred to as credit interest earned.

Under the old law, the interest rate was 1 percent over the prime rate published in the Wall Street Journal on the first business day of each calendar year. As of Sept. 1, 2005, the credit interest rate for tax refunds is the lesser of these amounts:

  • the annual rate earned on deposits in the state treasury during December of the previous calendar year; or
  • one percent over the prime interest rate published in the Wall Street Journal on the first business day of the year.

The interest rate is determined by the date of the refund claim. The claim can be an amended tax return, request for a transfer of the credit to another period, or request for a refund. A request with a postmark date prior to Sept. 1, 2005, accrues interest at the old rate, prime plus 1 percent. A request that occurs on or after Sept. 1, 2005, accrues interest at the lesser of the two rates described above.

Example of Credit Created by Amended Reports

For example, a tax return is due on May 20, 2005, and the report is filed and the tax paid on time. An amended return is filed on Aug. 20, 2005, creating a credit of $1,000. The credit interest would begin on the 61st day after May 20, 2005, or July 20, 2005. The interest rate paid on the credit would be prime plus 1 percent. If the amended return were filed on or after Sept. 1, 2005, however, the interest rate would be determined by which rate is lower - the Treasury Pool Rate or prime interest rate plus 1.

If you file multiple amended reports for a period, the interest rate is determined by the postmark date of the last one. For example, a tax return and payment are filed on time on June 20, 2005. An amended return is filed on Aug. 12, 2005, creating a credit of $3,000. Another amended return is filed on Sept. 1, 2005, creating an additional credit of $4,000, for a total credit of $7,000 for the filing period. The credit interest will start accruing on the 61st day after June 20, 2005, or Aug. 20, 2005, but the interest rate on the entire $7,000 credit would accrue at the lesser of the two rates since the second amended return was filed Sept. 1.

Credits in Audits

A credit that is scheduled in an audit will be refunded once the audit is completed using the interest rate in effect on the entrance conference date of the audit. If the entrance conference is prior to Sept. 1, 2005, the interest rate accrues at the prime plus one rate. If the entrance conference is on or after Sept. 1, 2005, the interest accrues at the lesser of the two rates.

Refund Claims Verified by Audit

A refund claim with a postmark date prior to Sept. 1, 2005 accrues interest at prime plus 1 percent. If the postmark date is on or after Sept. 1, 2005, it will accrue interest at the lesser of the two rates.

Transfers of Credits

Each transfer of a credit is treated as a new transaction. If a later transfer has a postmark date on or after Sept. 1, 2005, then the interest rate will accrue at the applicable rate.

Example:

An amended report for January 2005 is filed on April 1, 2005, creating a $5,000 credit. A transfer request moves the $5,000 credit to the May 2005 filing period. Credit interest will accrue at the old rate of prime plus 1 percent. A second transfer is filed on Oct. 1, 2005, moving $2,000 to the July 2005 filing period. For this transfer, credit interest will accrue at the lesser of the two rates. Each transfer of a credit forward is subject to credit interest. Transfers of credit to previous periods are not subject to credit interest.

Credit Interest Earned on Transfer of Credits

Credit interest created by a payment or transfer of payment from one period to another of an eligible report period used to satisfy some, or all, of a liability is referred to as credit interest earned.

An overpayment in a report period exists when the total amount of payments, money transferred-into a report period and/or credit interest earned, exceeds the liability. The overpayment could consist of multiple payments received, payments transferred-in and/or credit interest earned.

The postmarks of payment received and postmarks of payments transferred into a report period are posted in chronological order. If a report period has a payment transferred-in and this payment resulted in credit interest earned, then the process date of the credit interest earned is posted chronologically along with the postmarks of payments received and payments transferred-in.

The method of processing refunds issued in a report period and transferring out an overpayment from one report period to another is the "last in first out" (LIFO) method. The postmarks of a payment received and/or payment being transferred-out determines the eligibility and calculation of credit interest earned.

Based on the preceding information and using existing eligibility and calculation rules for credit interest the following rules apply:

  1. Any overpayment comprised entirely of tax accrues credit interest on the full amount of the overpayment.
  2. Any overpayment comprised of tax and credit interest earned accrues credit interest only on the full amount of the tax portion of the overpayment. The portion for credit interest earned does not accrue credit interest.
  3. Any overpayment comprised entirely of credit interest does not accrue credit interest.
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