Paying Taxes On Deposit Account Earnings: Do I Have To?

If you’ve taken advantage of our bank promotions and credit card promotions, you may be wondering, do you have to pay taxes on deposit account earnings? To answer your question, yes you do! Any sort of interest or any sort of bonus incentive you earn, you will normally need to pay taxes on.

Below, we’ll give you a better understanding or at least help you know more about the policies regarding taxes and deposit account interest income.

What Is A Form 1099-INT?

For all the bank bonuses and credit card bonuses you may have encountered somewhere that your bonus will be reported on a Form 1099-INT.

Form 1099-INT is the tax document issued by banks and payers of interest. You and the IRS will get a copy each. Financial institutions are required to send out Form 1099-INT if they paid you $10 or more in interest.

If you didn’t receive a 1099-INT, that doesn’t mean that the IRS did not receive a copy. You still have to report any taxable interest income for the year.

Reporting All Of Your Income To The IRS

When the time comes around to file your taxes, the IRS expects you to report ALL of your income — no matter how small it may be. Aside from the obvious work income, you will need to include any sort of income from your side business(es), interest, and dividends.

If the IRS decides to take a more in-depth look at your tax return papers, an agent might find a bank account that shows you earned more than you’ve reported. The consequence is that you may have to pay a penalty, interest, and the amount you owe — which could get pretty costly. In the worse case, if the agent suspects you of tax fraud (even if it was an innocent mistake), it can get more expensive and more severe.

How your interest income will be taxed is based on your marginal tax rate. This is the rate of the highest tax bracket you will fall into. Your entire income won’t be taxed at the same rate. Income tax rates are broken down into levels and that will determine what tax rate you may or may not pay.

To get a quick look, if you make more than your average Joe, a portion of you income will be taxed at 10%, a portion at 15%, and a portion at 25%, etc up to the highest tax bracket that you fall in. Your interest income earnings will be added to your actual earned income and other income(s) as you adjust/figure your adjusted gross income.

Interest on Your Sigh-Up Cash Bonuses

Banking customers who opened a new bank or credit card account with a sign-up bonus offer will receive a Form 1099-INT for that amount of that bonus. If you got the cash bonus for opening a Chase checking and savings account or the Wells Fargo Cash Wise Visa® Card cash back bonus, the bonuses are considered taxable interest income.

If your bank has a referral program like PNC Bank that pays you for completed referral sign-ups, the referral commission is also reported on Form 1099-INT.

Note, cash back and reward points earned on credit and debit card purchases are not considered taxable interest.

Interest on Your Savings Account

As mentioned previously, you will need to report all forms of income. Yes, that means that you will need to report the interest earnings from your savings account(s) as well. This includes interest from any sort of interest bearing account such as a checking account that earns interest, money market accounts, etc.

For the majority of the time, you can find info about the interest you earned through the 1099-INT that your financial institution sends you, request this info by asking your bank, or look at your bank statement for the last month of the year. If you’re a credit union member, your dividends as a member will be accounted as bank interest.

When you report income from the interest you’ve earned, you can do so on the front side of your Form 1040-A, or on your Form 1040-EZ if you have earned less than $1,500 in interest. If your interest earnings amount to more than $1,500, you will have to file a Schedule B along with your tax return. If you end up having to file a Schedule B, it will make you ineligible to file a Form 1040-EZ.

For money earned from dividends exceeding the amount of $1,500, you are probably familiar with Schedule B since you use it for both dividends and for interest earnings. It is worth noting, though, that your earnings are clearly separated by category. You do not add your dividends and your interest income together to determine whether or not to file a Schedule B. If you earn $1,300 in interest income, and $1,000 in dividends, you will not have to file a Schedule B. You only have to file the Schedule B when one of the totals reaches $1,500.

Interest on Your Certificate of Deposit Account

When investing your funds into a certificate of deposit (CD) account, one of the most important things to remember is that you owe taxes on interest income earned on a CD. Although a CD may not reach maturity for several years, the bank may send you Form 1099-INT in every year that the CD is earning interest.

You are generally expected to pay taxes on the income for the year that you earned it. So, even if the bank didn’t sent you a check for the interest (some just add it to the CD), you still have to pay income taxes on the interest.

The main exception (and there are other exceptions) to paying income tax on your CD interest earnings is the IRA CD. Because a traditional IRA is a tax-deferred account, you do not usually have to pay taxes until you actually withdraw money from your CD account. This is one of the reasons that some prefer to open an IRA CD instead of other CD products.

Your interest earnings from a CD may be offset by penalties that you pay for early withdrawal. As you know, taking money from your CD account before it expires will result in a penalty. This penalty can provide you with a tax break. Basically, you end up subtracting the amount of the penalty from the amount of interest that you earned to get your effective interest income from the CD. You’d report your CD penalties on your tax form, and it would offset some of the earnings from interest that you report.

Interest on Non-Cash Gifts and Services

Some banks still offer non-cash gifts and services as a bonus, such as iPads and Amazon Echos.

According to IRS Publication 550 Investment Income and Expenses: “If you receive non-cash gifts or services for making deposits or for opening an account in a savings institution, you may have to report the value as interest.

For deposits of less than $5,000, gift or services valued at more than $10 must be reported as interest. For deposits of $5,000 or more, gift or services valued at more than $20 must be reported as interest. The value is determined by the cost to the financial institution.”

Author’s Verdict

Regardless of your earnings, whether it be from your current job, bank bonus, side business, etc., the IRS expects that you will report your earnings. In most cases when you earn deposit account incentives, you most likely will receive a 1099-INT describing your interest income.

In the case that you don’t receive this paperwork, you should still report your earnings. If you are still confused or have questions about your taxes, and what should be reported on them, it is a good idea to consult a tax professional who can help you navigate the rules. When you open a new account, credit line, etc, are you informed of how it can affect your credit? Learn the difference of a soft pull vs hard pull here.