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Do I Have to Pay Taxes on Deposit Account Earnings?


Do I Have to Pay Taxes on Deposit Account Earnings?

One of the questions that many have when it comes to taxes is whether or not it is required to pay taxes on deposit account earnings. The short answer is yes. If you earn interest on a deposit account, you normally have to pay taxes. However, it helps to know a little more about the policies surrounding taxes and deposit account interest income.

Reporting All Income to the IRS

When you file your taxes, the IRS expects you to report all your income, no matter how small. This includes income from any side businesses that you may have, as well as income from interest and from dividends. It is important to note that you are supposed to report income even if you don’t receive a 1099. Just because you didn’t get a copy of a 1099 doesn’t mean that the IRS didn’t receive one. On top of that, if the IRS decides to take a closer look at your tax return paperwork, an agent might find a bank account that shows that you earned more than you reported. You would have to pay a penalty, interest and, of course, the amount that you owe. This can get pricey. Plus, if the agent suspects outright tax fraud rather than an innocent mistake, it can get even uglier – and more expensive.

Your interest income will be taxed at your marginal tax rate. This is the rate of the highest tax bracket you fall into. (Your entire income is not taxed at the same rate. Each level of income is taxed at the bracket it falls into. A portion of your income is taxed at 10%, a portion at 15%, a portion at 25% and so on, up to the highest tax bracket you are in.) Your interest earnings will be added to your earned income and other income as you figure your adjusted gross income.

Interest on Your Savings Account

You will need to report the interest earnings from your savings accounts. This also includes reporting interest earnings from money market accounts and from interest bearing checking accounts. Most of the time, you can find information about the interest you earned on the 1099-INT that your financial institution should send you. You can also ask your bank for this information, or look at your bank statement for the last month of the year for information on interest that you have earned for the year. If you are a member of a credit union, any dividends you receive as a member will be counted as bank interest.

When reporting income from interest, you can do so on the front side of your Form 1040A, or on your Form 1040EZ 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 1040EZ.

If you also earn money 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 from Your Certificates of Deposit

One of the most important things to remember is that you owe taxes on interest income earned on a CD. This is true in most cases – even if you did not receive a check for the interest. You will probably receive a 1099-INT detailing the interest your CD account earned for the year, and 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 others) 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 would report your CD penalties on your tax form, and it would offset some of the earnings from interest that you report.

Bottom Line

The IRS expects that you will report your interest earnings. In most cases, you are likely to receive a 1099-INT describing your interest income. Even if you don’t receive this paperwork, though, you should still report your earnings. If you have a question 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.



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Comments
25 Comments.
Comment #1 by Anonymous posted on
Anonymous
To answer the question:  Yes.

15
Comment #2 by Anonymous posted on
Anonymous
What if you took advantage of Ally's 5 year CD? They show no interest at all on the CD until the CD matures in 5 years. A $10,000 CD opened 3 years ago still shows $10,000. Ally pays all interest at the end of the 5 years. How should this be handled?

11
Comment #3 by Anonymous posted on
Anonymous
Most people KNOW they earned reportable interest when they receive a 1099.   If the bank don't send a 1099, how can someone report earnings they dont know about?  

5
Comment #7 by Anonymous posted on
Anonymous
Do I have to pay income tax on my income?

17
Comment #8 by me1004 posted on
me1004
To #2: you owe tax on interest income for the year in which you received it, that is in which it is posted. If you do not receive any of it until the end of the five-year term, then that year at the end is the one in which it is taxable.

While most banks post the interest as you go, whether monthly or quarterly, some do wait until the end of the CD term.

5
Comment #9 by Bob1 (anonymous) posted on
Bob1
What about the fee's that banks charge?  Can they be subtracted from the interest income?

5
Comment #10 by knappster (anonymous) posted on
knappster
Also to #2: I had a shorter CD with Ally (was actually GMAC at the time I opened) which came due January 2010.  All of the interest was on the 1099-INT for 2010.  However, it was the last 1099 which I received.  I think they waited until the last possible microsecond to get it sent, because I e-mailed them a few days into February and it still hadn't arrived or been posted on their website.  Miraculously it showed up in both places a few days later (so you may have to give them a nudge if you ever want to see it).

2
Comment #11 by barnarbas posted on
barnarbas
To Anon #2 you may want to check again because I have Ally 5 year CDs and they pay out interest at the end of each year which is reported on a 1099.

12
Comment #12 by barnarbas posted on
barnarbas
To Bob1 unfortunately not on personal accounts, if they are business accounts then the fees are a business expense.

2
Comment #14 by Anonymous posted on
Anonymous
You cannot put off paying taxes on a CD for 5 years.

If you really and truely have a CD that pays or credits interest less than once a year, then you have to treat the CD as an original issue discount (OID) note  (like a zero-coupon bond) and pay tax annually on the imputed interest.  The bank should issue a Form 1099-OID in such a case.  See "Certificates of Deposit" on page 14 of Publication 550. http://www.irs.gov/pub/irs-pdf/p550.pdf

You, the CD owner, are required to include the interest you receive on your tax return, no matter how and no matter whether you received a 1099-INT.

The payer (the bank) is not required to issue a 1099-INT unless the amount of interest is $10 or more, but they are allowed to.  If they send a copy to the IRS, they must also send you a copy.  If you earned $10 in interest but don't receive a 1099-INT, the reason is some sort of clerical error, the bank does not have a current/correct address on file, your mail was misdelivered, someone in your house thought it was junk mail and tossed it, etc.

How are you supposed to know you earned reportable interest?  All interest is reportable interest.  Presumably you know that you have a bank account.  If you don't receive a 1099 by the middle of February, call, vist, or login to your bank.

 

9
Comment #15 by Anonymous #2 (anonymous) posted on
Anonymous #2
Ally does not send a 1099-INT or a 1099-OID. They will (and they have in the past) issue a single 1099-INT on the 5th year for the full amount. If I were to report the phantom interest the previous 4 years and just the phantom interest in the 5th year, I'm guaranteed to receive a request for information during year 5 when the interst doesn't match.

I understand your point, it's like when you buy zero-coupon bonds that doesn't pay out interest at all until the bond is due (up to 3o years later), you are required to pay the phantom interest every year. This is clearly spelled out and the phantom interest calculated for you so you can pay properly. Such is not the case with the Ally CD. Anyone with a multi-year Ally CD will have seen this to be true. Hence my question.

2
Comment #16 by Anonymous posted on
Anonymous
Do you have to report interests earned in credit union savings and checking account if interest is less than $1? Like only $0.14 total?

4
Comment #17 by Anonymous posted on
Anonymous
When you calculate taxes you round to the nearest dollar, so I would think not.

 

2
Comment #18 by Anonymous posted on
Anonymous
My understanding was always that the interest had to be at least $10.00 to be reported.  You would usually get the 1099INT on any interest the institution reported to the IRS.  If they report it, you must also.  BTW, there are banks who may only pay interest annually and you do not have to report that interest until it has been deposited to your account no matter how much it was.  You report it in the year it was accessible to you.  This confused me for a while until I caught on to how different banks pay interest. You also would not get a 1099 INT for the interest until it was accessible to you.  I mainly check all my 1099INTs to make sure I get everyone I feel I am due to receive so I can report them accurately.

5
Comment #19 by Anonymous posted on
Anonymous
I closed two interest-bearing account(s) in the past year due to a divorce.  I probably earned less than $10 and my bank doesn't send a 1099-INT if I don't earn more than $10, but I'd like to scrupulously honest with the IRS.  I can't login to my accounts because they're closed and my bank won't produce a report unless I pay them to, which might cost more than the interest I earned.

1
Comment #20 by Mabe (anonymous) posted on
Mabe
I have a Ltd. company. I lent money to other people for their business ventures. The interest earned from this is sitting in my business account. How do I get it out ?. The income tax has been paid by the business and I own the company 100% and I tried to get info from the company that does my tax returns but they don't know. Who would be able to direct me.

2
Comment #21 by Apache posted on
Apache
Mabe:  Did anyone send you a 1099INT for interest earned if it was over $10.00?  I think I would not allow any one to do my taxes who can't answer these questions for me.  If you are the owner of the business account  you should have all rights to accessing that account and getting the interest out.  Something seems wrong here if you don't have people who can tell you how to access your own money, imo.  Someone has to be named on that account.  If it is not you, I would contact them.

2
Comment #23 by skhou (anonymous) posted on
skhou
What if you purchase a 10 year CD in an overseas bank offering higher rates.  Agree that we have to convert the Interest amount from overseas currency to USD and pay short term tax rate taxes on it for every year.  However, the original capital when you convert back to USD after 10 years may be converted to an amount lower than original investment (if the USD got to be stronger).  Is that Loss considered a short term loss or long term loss.  It is critical because the tax rates are different.  Any comments or help will be appreciated.

2
Comment #24 by Anonymous posted on
Anonymous
Any interest less than $10 is not reported by the bank and they do not issue a 1099. This is direct from the bank as I questioned them regarding my interest of $5.25 for the year.

2
Comment #25 by CC (anonymous) posted on
CC
Hey All...  One good thing about deposit account taxes is that you do NOT pay any Social Security or Medicare taxes on these earnings, so every dollar you earn in interest gives you MORE money in your pocket than what you get from actually working!  I work full-time, but I don't earn a lot, so my interest income is very important to me.  When figuring my taxes this year, I realized that a dollar in interest earned equals more money in my pocket than a dollar from working!  That was good news for me!!!

3
Comment #26 by Anonymous posted on
Anonymous
Enjoy it while it lasts because they get you later on when you start drawing social security.  The interest from your deposit accounts is included in the amount of income used to determine how much of your social security will be taxed.  If you earn enough deposit account interest, up to 85% of your social security can be taxed.

3
Comment #27 by Anonymous posted on
Anonymous
A handy tip: If you want to verify the 1099's the IRS received, just call up the 800 number. You usually have to punch in a response unrelated to what you want to get a human being on the phone as there is no selection for what you seek. I have had the representative go through 90 1099's and stock salre reports, reading me the payer and amount. If you don't do this furing tax season it takes about 5 minutes to get someone.

You can also ask for a tax transcript but I have never had one that showed the detail or even the total interest.

1
Comment #28 by Anonymous posted on
Anonymous
Does this apply to Credit Union Reward Checking Accounts? There is a required number of transactions, etc to earn higher interest so not sure if those prerequisites affects taxability of interest.

1
Comment #29 by CuriousDave (anonymous) posted on
CuriousDave
Interest on CDs is not earned when the CD matures - it accrues over the term of the CD. Therefore, the tax that must be paid for each year interest is earned is not on "phantom" interest but on earned interest, whether received in cash or not. Some institutions (Mountain America is one example) allow - or used to allow - the investor to cash out the interest  earned on a regular basis, e.g. monthly or quarterly, on which tax would obvoiusly be payable in the year the interest is withdrawn.

In addition to CDs held in IRA accounts, there is another common situation where tax on the interest earned is deferred: for individual taxpayers (includes marrieds) if the term is 12 months or less, the institution will not issue a Form 1099-INT for the calendar year in which the CD was purchased, except for interest that was actually cashed out. Tax will be postponed until the calendar year of maturity. Example: 12 month CD for $10,000 purchased by an individual on July 1, 2013, maturing June 30, 2014; for convenience, assume 1%  p.a. simple interest  only (i.e., no compounding, so APY =1%). Interest earned for 6 months ended 12/31/2013 = $50.00. No Form 1099-INT will be issued for that $50.00 and the individual investor is not required to report it, even though it was earned in 2013. Assuming that the investor withdrew none of the interest earned until maturity, Form 1099-INT will be issued for 2014 only,  for the entire 12 months of interest = $100.00. For CDs with terms longer than 12 months, individuals will be issued Forms 1099-INT for  the appropriate amounts of interest earned in each calendar year for the term of the CD. The rules for over-12 month CDs are not the same as the rules for Original Issue Discount (OID) which apply mostly to deep discount bonds (like zero coupon bonds) and to collateralized mortgage obligations (CMOs).

 

1
Comment #30 by Anonymous posted on
Anonymous
My bank tells me that there is no such thing as 12 month rule. They say that any interest they post to the CD account during the calendar year will be taxed and a 1099 form will be issued in all cases except if the interest for the year is less than $10.00.

1