Tax season is in full swing so consolidate your charitable donation receipts, deductions, and W-2 forms to submit to the Internal Revenue Service. You may be liable for additional taxes if you have earned interest or received sign-up bonuses from banks.
Due to the Federal Reserve’s ongoing rate hikes, interest rates on bank accounts such as high-yield savings account were high in 2022. Sign-up bonuses for bank accounts and promotions are also high, often exceeding $100. The IRS views interest and bonuses as an additional income source, so the government must take its share.
What is the tax rate for bank interest and bonuses?
Savings account interest is subject to the same tax as income. This rate is between 10% and 37% in the United States for 2023. Your bank might send you a 1099INT tax form if you have earned interest. These forms are issued to you by banks and other businesses that offer interest. They let you know how much tax you owe on earned interest.
Bank bonuses are generally taxed in the same manner, but you may receive a 1099MISC form instead or in addition to a 1099INT form. Banks sometimes don’t send any forms.
Matt Bundrick, cofounder of BankBonus.com by email, stated that not all financial institutions send 1099s for bank bonus. However, this does not exempt you from the obligation to include them in your tax return .”
You can add any income you have received from a bank, including interest or sign-up bonuses, to your 1040 form. This allows tax filers to list any other income, such as jury duty pay, prize winnings, alimony, and other non-W-2 or 1099 earnings. You may be asked to include additional income in your tax software submission. The software will then tell you how much debt you have.
You can reach the IRS to modify your tax return .
What is the tax difference between bank bonuses and credit card bonuses?
Credit card bonuses don’t have to be taxed by the IRS. These bonuses are not considered income and are therefore not subject to taxes.
Credit card bonuses are usually earned only by spending a specific amount and often within a specified time period, such as three months.
How can I be smart with my Bank Account Interests and Bonuses
It’s a smart idea to save a portion of your earnings in advance for taxes if you receive a bonus or interest on your savings. It can help you feel secure by keeping your tax money in an account that is not accessible to the public, such as a separate savings account.
Walter Russell, CEO at Russell and Company financial advisor firm, said via email that he recommends clients keep track of their interest, dividends, and bonuses throughout the year to avoid being surprised when they get these statements. “Some of my clients pay quarterly estimated tax so that the tax burden will be lighter come tax season .”
You’ll likely owe higher taxes if you earn multiple bonuses for opening bank accounts by moving money between accounts or opening new ones.
You’ll need to remember other details about bonuses, in addition to taxes.
Bundrick stated, “Know what the terms are before you sign up.” This will save you headaches later. It’s not a good idea to wonder where your bonus is and then find out that you didn’t include the promo code in your application span>
This year’s taxes are due on April 18, so make sure to check into any tax obligations regarding your bank account when you prepare your forms. Even if you don’t know it, underreporting income can result in an IRS audit or legal problems like tax fraud charges. You should be able manage your paperwork well and pay your taxes on time to avoid a difficult tax season.
This article was written and published originally by The Associated Press by NerdWallet.