The state of Massachusetts charges interest on outstanding taxes, at a rate of the federal short-term interest rate plus four percent, compounded daily. The federal short-term interest rate is set by the Internal Revenue Service and appears on its website. Although it is possible to use the compound interest formula to manually calculate the interest you owe on your taxes, if your math skills are rusty, you may prefer to use an online compound interest calculator.
Determine the original amount of your tax bill before any overdue interest was charged. This original amount was the amount owed on the day the taxes were required to be filed in Massachusetts. For example, you may have had $10,000 owed on April 15 when your return was required to be filed. This amount is your principal tax amount for the purpose of the interest calculation.
Determine the federal short-term interest rate by visiting the IRS website. For example, in January 2011, the federal short-term rate was 0.43 percent.
Add four percentage points to the federal short-term rate to come up with the rate charged on overdue taxes in Massachusetts. If the short-term rate is 0.43 percent, the total rate of interest is 4.43 percent.
Enter the appropriate variables into the compound interest formula A=P(1+r/n)^nt. The result, "A," will give you the amount of your original taxes plus all interest. In the formula, "P" is your principal amount, or $10,000. "R" or "r" is the interest rate as a decimal. In this case, the rate is 0.0443. "N" or "n" is the number of times the interest is compounded. In the case of daily compounding, the interest will be compounded 365 times. The symbol "^" means "to the power," exactly like 3 to the power of 4 is equal to 3 x 3 x 3 x 3 = 81. In the formula, "t" is the number of years the interest is compounded.
Solve the equation. The result is the amount of taxes you owe, plus applicable interest. For example, if your outstanding taxes in Massachusetts on the day they were due was $10,000 and that amount remained outstanding for a full year, the total amount owing would be $10,452.93.
Subtract your original tax amount from your result. This result is the amount of interest owed on your unpaid taxes. Therefore, if your total amount owed is $10,452.93 and your original amount owed was $10,000, the amount of interest owed is $452.93.
Visit a website with a compound interest calculator, such as Bankrate.com, if you prefer not to calculate the interest manually.
Catherine Lovering has written about business, tax, careers and pets since 2006. Lovering holds a B.A. (political science), LL.B. (law) and LL.L. (civil law).