As the tax season gains momentum, you might find yourself busy organizing your charitable donation receipts, deductions, and W-2 forms for submission to the Internal Revenue Service. However, if you’ve also benefited from bank sign-up bonuses or accrued interest on your bank balance, you should be aware that additional taxes might be in order, which could catch you off guard.
In 2022, interest rates on bank accounts, especially high-yield savings accounts, reached new heights due to continuous rate hikes implemented by the Federal Reserve. Bank sign-up bonuses and promotional offers also reached record levels, often exceeding $100. It’s important to note that the IRS classifies both bonuses and interest as additional income, implying that you need to allocate a portion of it for taxes.
Understanding the Tax Rates for Bank Interest and Bonuses
Interest earned from savings accounts is taxed at the same rate as your regular income, which falls within the range of 10% to 37% in the United States for the year 2023. If you’ve earned interest on your savings, your bank is likely to send you a 1099-INT tax form. These forms are issued by businesses that provide interest, such as banks, and they detail the amount you owe in taxes for your earned interest.
Bank bonuses are typically subject to the same tax treatment, although you might receive a 1099-MISC form in addition to or instead of a 1099-INT form. It’s worth noting that some banks may not send out these forms at all.
Matt Bundrick, co-founder of BankBonus.com, emphasizes, “Not all financial institutions send out 1099s for bank bonuses, but this doesn’t exempt you from your obligation to report them on your tax return.”
If you’ve earned a bank sign-up bonus or interest and haven’t received the corresponding tax forms, you can include this income on your 1040 form. The 1040 form allows you to list any additional income, such as prize winnings, jury duty pay, alimony, and other earnings not covered by 1099 or W-2 forms. If you’re using tax software, it will guide you through adding this additional income and calculating your tax liability based on your filing.
In case you realize that you omitted some income from your initial tax filing, you can reach out to the IRS to amend your tax return.
Distinguishing Bank Bonuses from Credit Card Bonuses in Terms of Taxation
Credit card bonuses are treated differently by the IRS. These bonuses are typically categorized as rebates on spending rather than income, and, as a result, they are not subject to taxation.
Credit card bonuses are usually earned by spending a certain amount within a specified timeframe, often three months.
Smart Strategies for Managing Bank Account Interest and Bonuses
If you’re receiving a bonus or earning interest on your bank balance, it’s a prudent move to set aside a portion of your earnings in advance to cover your tax obligations. To ensure you don’t accidentally spend this amount, consider keeping your tax money in a separate savings subaccount designated for taxes.
Walter Russell, CEO of the financial advisor firm Russell and Company, recommends, “I advise clients to maintain a record of their interest, dividends, and bonuses throughout the year to prevent surprises when they receive their statements. Some of my clients even make quarterly estimated tax payments to reduce the tax burden when tax season arrives.”
It’s important to note that if you actively pursue multiple bank account sign-up bonuses by frequently opening new accounts and transferring money between them, you’re likely to owe more taxes due to the increased earnings. Additionally, you should pay attention to the terms and conditions of these bonuses to avoid potential headaches down the road.
As you compile your tax forms, remember that taxes are due by April 18 this year. Failing to report income, even inadvertently, could lead to an IRS audit or potential legal issues like tax fraud charges. Staying organized and fulfilling your tax obligations will enable you to navigate the tax season smoothly while maximizing your bank account earnings.