Federal Reserve interest rate and U.S. taxpayers

The rise of inflation often brings discussions about U.S. interest rate hikes, which are almost always implemented contrary to market expectations and often against the preferences of U.S. presidents. The Federal Reserve’s interest rate increases put significant pressure on the financial markets, which typically respond with falling stock prices and expectations of declining corporate profits. Many companies had previously benefited from “cheap money” in the form of loans, real estate investments, vehicle financing, and more.
Since nearly all of us are directly or indirectly invested in the financial markets, which experience volatility during such periods, it’s important to understand how interest rate hikes affect U.S. tax
filers.

How Interest Rates Affect Tax Filers in the U.S.
In every country, local authority, and even in the private sector, interest is applied to loans or unpaid debts, serving as the cost of using money—no matter how strange that may sound.
For U.S. tax filers who owe income tax or withholding tax and fail to make timely quarterly payments or meet legal deadlines, the IRS imposes interest charges on unpaid amounts, as stipulated by law. In some cases, late payments may also result in penalties, which accrue interest as well.
According to the U.S. tax code, IRS interest rates are calculated quarterly and publicly disclosed. The interest rate applied to income tax liabilities (or IRS refunds owed to individuals who are not corporations) is determined based on the Federal Reserve’s base rate plus a 3% margin.

How Are Federal Reserve Interest Rates Set?
The Federal Reserve, or “Fed,” determines its interest rates through the Federal Open Market Committee (FOMC), which meets eight times a year. The committee sets interest rates based on the current state of the economy and the widely-followed “dot plot” projections.
The announced interest rate is always disclosed to the public as a range rather than a fixed percentage. For example, during the last financial crisis (from 2008 until December 2015), the Federal Reserve maintained an interest rate range of 0%–0.25%.

What Does This Mean for You?
The cost of money increases as the Federal Reserve raises interest rates.
If you owe money to the IRS, it is advisable to make your payments on time—or even prepay them—to avoid accumulating unnecessary interest charges. The higher the Federal Reserve’s interest rate, the more expensive your unpaid tax liability becomes.
On the other hand, if the IRS owes you money, the interest rate applied to refunds can be highly beneficial—sometimes even outperforming popular investment options.
For example, the IRS interest rate for the first quarter of 2019 was 6%! The last time IRS interest rates were this high was in 2008.

Bottom Line: Protect Your Money
With rising federal interest rates, tax filers should be proactive. Paying taxes on time can save you from accumulating costly interest charges, while refund recipients may benefit from higher-than-average returns on owed amounts.
Understanding how federal interest rate policies influence IRS interest calculations can help you make smarter financial decisions. Stay informed, pay strategically, and protect your money.