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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.

  |     |   Comment #1
To answer the question:  Yes.
  |     |   Comment #2
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?
  |     |   Comment #3
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?  
  |     |   Comment #7
Do I have to pay income tax on my income?
  |     |   Comment #8
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.
  |     |   Comment #9
What about the fee's that banks charge?  Can they be subtracted from the interest income?
  |     |   Comment #60
What bank is charging you fees and at what cost?
  |     |   Comment #10
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).
  |     |   Comment #11
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.
  |     |   Comment #12
To Bob1 unfortunately not on personal accounts, if they are business accounts then the fees are a business expense.
  |     |   Comment #14
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.

Anonymous #2
  |     |   Comment #15
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.
  |     |   Comment #16
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?
  |     |   Comment #68
Interest amounts of less than $10 in a tax year are not required to be reported on Form 1099. Some banks do and some banks do not submit the 1099 to the IRS If the amount is less than $10. Do you have to report it? You are supposed to. Also, you are supposed to report tax exempt interest on your tax return even though it is not taxable. Do you have to report non-taxable interest? You are supposed to.
  |     |   Comment #17
When you calculate taxes you round to the nearest dollar, so I would think not.

  |     |   Comment #18
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.
  |     |   Comment #19
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.
  |     |   Comment #20
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.
  |     |   Comment #21
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.
  |     |   Comment #23
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.
  |     |   Comment #24
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.
  |     |   Comment #25
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!!!
  |     |   Comment #26
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.
  |     |   Comment #72
I would consider that the price of success. If you are earning that much deposit account interest then chances are you are doing well.
  |     |   Comment #27
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.
  |     |   Comment #28
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.
  |     |   Comment #29
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).

  |     |   Comment #32
Depends on the bank. Some will issue a 1099 and my suggestion is to pay the tax and move on. Audits are a pain.
  |     |   Comment #30
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.
  |     |   Comment #31
A couple of years ago I spent three months in Thailand.  I opened an account for a few thousand dollars to pay bills and not not have to carry around a bunch of cash.  When I left I took the balance and returned to the US.  Never thought about it again.  Now I understand I should have reported it to the IRS.  What should I do?
  |     |   Comment #33
And, the statute of limitations is...? Over $10K use to have to be reported.  However, when you initially took the money out of US Bank and put back in upon return, those banks are required to report to Treasury if over $10K...I suspect, if that amount, Treasury would have already contacted you, otherwise must have been below the threshold.  One can always turn themselves in!  :-)
  |     |   Comment #34
PS  There is also a form on the 1040 that asks if you had control over a foreign bank acct....there is no set $ amount for that.
  |     |   Comment #37
what if I already filed my taxes and then received my 1099-INT form with $300 earned from checking account??
  |     |   Comment #38
you'll need to file an amended form X to keep your piece of mind, :), or you could let it ride and hope you don't get audit :)

btw, any amount IS taxable, even if under 10 bucks, the only thing the banks don't do is create a 1099 for anything under 10 bucks. I've got that type of stuff, like this year my WF checking int was $1.80, for the year lololol, no 1099, but still reported on schedule B., like I said piece of mind, they will hound you for 5 cents if they know you owe it.
  |     |   Comment #39
If one is in the 10% bracket, why one anyone go after $30 tax on $300?  When/if they send a letter send them a check for $30...if you got other issues, talk to an advisor. 
  |     |   Comment #41
I know interest is reportable to the IRS and the state you live in.  However is it reportable to the state that the interest was earned in?  For example, live in Kentucky, earned in Virginia,  Do I need to report to Virginia???
  |     |   Comment #42
No.  You only report interest for federal income taxes and the state you live in and only if that state requires filing state income taxes.
  |     |   Comment #43
I asked a tax attorney.  She said YES it is reportable to the state it was sourced in if that state required filing state income taxes.
  |     |   Comment #44
Interest/income is earned when received, i.e. in the state in which you are a resident 
  |     |   Comment #45
Just goes to show you.  Attorneys are not always right.  Anyway, you might ask your tax attorney why this turbo tax link is giving a different answer:
  |     |   Comment #46
Obviously, turbo tax is wrong!
  |     |   Comment #47
So #46, does that mean if I live in a state that has state income taxes, I could invest in cd's in other states that do not have state income taxes to avoid paying state income taxes on my cd's?
  |     |   Comment #48
And use an out of state address as domicile?
  |     |   Comment #49
To those of you that doubt that interest earned in another state (that has income tax) is taxable, you need to call that state's income tax department and ASK.  You are considered a non-resident with taxable income.
  |     |   Comment #50
#49 - Maybe you can answer these questions also.

If you live in a state that has state income tax, I guess you pay taxes in both states.  Do you pay taxes in the state you reside in and also on the interest earned on the cd in the other state (that has income tax).  That sounds like double taxation to me.  What about dividends?  Do you pay taxes on the dividends in the taxable state that you reside in and also the taxable state that the corporate headquarters is located also?
  |     |   Comment #51

I believe the author of comment #49 made a statement about interest only, not dividends. She  made a statement and challenged the doubters to call any state income tax department to verify her findings. Did you call?

It's your dime now!
  |     |   Comment #53
On Oct 6, 2016, I challenged readers on depositaccounts to the following:

"To those of you that doubt that interest earned in another state (that has income tax) is taxable, you need to call that state's income tax department and ASK.  You are considered a non-resident with taxable income"

Has anyone called their state's income tax department and ASKed the question?
  |     |   Comment #54
What did u find out after calling?
  |     |   Comment #55
You pay taxes in the state where you lived when the income was posted to your account.
  |     |   Comment #56
Yes that is true.  BUT you may also be required to pay taxes to the state where the interest was paid.  YOU should call both your resident state income tax dept and the state income tax dept the interest was paid in for further details.
  |     |   Comment #57
A lot of this was settled, in part, when federal legislation was signed that precluded states from requiring state employee pension recipients to pay that state's income tax on same notwithstanding they were no longer residents of those states where the pension was earned.  Thus, many state employees that retired in Nevada (no  state income tax) who earned a pension while working/living in Calif...do not pay any state income tax.  Of course, I'm sure donations are always welcomed!  And the 1099s reflect the accurate info and those, if sent, only go  (besides the feds) to the state of residency!
  |     |   Comment #58
Don't waste your time calling.
  |     |   Comment #69
The issue of domicile is what controls whether you are a resident or non-resident. If you primarily live in one state, its filing requirements determine how you are to report your income. If another state where you do business requires you to file even though you are not domiciled there, then you get a tax credit in your resident state return. That is how it is explained in my resident state tax brochure. Now if you are a vagrant with no fixed residence, then all bets are off.
  |     |   Comment #59
Hi I Earn 85 dollars for 1 year 2016 interest do i have to file form 1099s because that is only my income
  |     |   Comment #63
  |     |   Comment #61
I was discharged unlawfully & received a small settlement. How can I invest or save it & not be taxed until I spend it?
  |     |   Comment #62
Talk to the atty that represented you in settlement. Usually if back wages...taxed. If deemed personal injury, perhaps no taxes. What does the settlement agreement say? Or goes into ira?
  |     |   Comment #64
Dear Donald,
Sign the tax bill and put over $4K in our pockets next year. I used to be very liberal until I woke up. I'd rather spend OUR money on US than pay settlements for representatives who can't keep their pants up. I already have charities lined up (that's how we spend extra cash on US) for the extra cash so load your pen with ink and get busy signing!
  |     |   Comment #66
Is the penalty for early withdrawal deductible with IRS?
  |     |   Comment #67
Only if you have earned income and your interest exceeds $10,000
Unemployed 55
  |     |   Comment #70
I did not work last year. I used savings. I had 120 interst income from a savings account. Do I have to file a return?
  |     |   Comment #71
For a single person, you have to file a return if your gross income exceeds $12000. There are other factors where you have to file a return even with zero income (such as receiving a HSA distribution last year).

  |     |   Comment #73
If I have a savings account that's located in CA, but I live in a different state, will I still be charged tax from CA?
  |     |   Comment #77
No. You pay state income tax based on residency.
  |     |   Comment #78
losing...what happens if a person telecomputes/works with a firm in CA but that person resides in Nevada?
  |     |   Comment #79
"Residents of California are taxed on ALL income, including income from sources outside California . Nonresidents of California are taxed only on income from California sources."

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