How Bank Bonuses and Interest Can Increase Your Tax Bill
If you’re looking for a bank that pays high interest rates and new-customer bonuses, you’ll find that plenty are clamoring for your business. However, those perks are dual-edged swords in that you might be taxed on the “free” money.
“As rates have risen, high-yield savings accounts have become fashionable once again, with some banks competing aggressively to stay at the top of the rate tables that consumers rely on for comparison purposes,” Andrew Davidson, chief insights officer at Mintel, told Reuters.
As a bigger incentive to encourage people to open a new account, banks and credit unions are also offering sign-up bonuses in the form of cash deposits that can be worth $100 or more.
Both of these incentives are taxable at the usual rate for your tax bracket and must be reported to the IRS when you file your tax return.
Banks and financial institutions typically send a Form 1099-INT for interest earned over $10. But even if you haven’t received a Form 1099-INT or you earned less than $10 in interest for the tax year, you’ll still have to report it.
You must also report bank sign-up bonuses as income. Your bank might report the bonus on a 1099-MISC instead of, or in addition to, a 1099-INT, according to the Los Angeles Times.
If you tend to open a lot of bank accounts and receive bonuses or interest, you might want to soften the blow of a tax bill increase by keeping a record of the additional income you have received and set aside funds to cover taxes on the income.
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“I recommend that clients keep a log of their interest, dividends and bonuses throughout the year so as not to be surprised when they receive these statements,” Walter Russell, chief executive of financial advisor firm Russell and Co., told the LA Times via email. “Some of my clients pay quarterly estimated taxes so that the tax burden is lighter come tax season.”
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