Tax Deferment On Cds

ratefinder | Mar 9, 2020 | 52 posts since 2020

Saw this posted in one of the forums and was interested too...

Does anyone know of a bank(s) that allow depositors to receive interest at maturity for a 1 year CD to defer taxes into the next year? Ally does it, but does any other institution? Thanks in advance.

Post an answer

Answers

ratefinder | Apr 27, 2020 | 52 posts since 2020

I was able to find this on BMO Harris's website.
Although BMO did say that the 9 or 11 month CD would not issue a 1099 in 2020, they didn't leave me with much confidence in their response. Anyone have any experience?

"For all CDs with maturities less than one year, interest for your Account will be compounded daily and will be credited to your CD at maturity. For all CDs with maturities one year or greater, interest for your Account will be compounded daily and will be credited to your CD quarterly."

ratefinder | May 1, 2020 | 52 posts since 2020

Update:
Confirmed with 2 separate Customer service representatives, including a Vice President. Hope they are correct.

CuriousDave | May 3, 2020 | 233 posts since 2018

Banks to not have the legal authority "allow" depositors to defer taxes, but their policies may have that effect. There are complex rules regarding the timing for recognition of income for tax purposes. One of these rules deals with "constructive" income: for cash basis taxpayers (which includes the vast majority of individuals), at the time that income that is made available to use or, if in an account, to draw upon at will, it becomes "constructively" received, whether actually withdrawn or not, and must be included in income in the calendar year so received. Banks can set their own policies as to when and how interest is added to customer accounts. One bank's policy may be to credit CD accounts every month, another only once every 6 months, and so on. Under the rules, for CDs of 12 months or less, whatever the bank's policy is regarding the timing of crediting interest will determine the year in which we have to include interest income on our tax return. Example: if we purchase a 12 month CD from Bank A on July 25, 2020 and the bank's policy is to credit our account every 6 months (from date of investment), although we will have earned over 5 months of interest n 2020, because of the bank's policy, our account will not be credited with interest until January 2021, so we will not have the use of the money until 2021. In that situation, the bank will not issue a 1099-INT for 2020 and will include the entire 12 months of interest thru 7/25/20 on a 2021 Form 1099-IT (which it will issue early in 2022), so we will then not include any of the interest we earned in 2020 on our 2020 return. If instead the bank's policy is to credit the CD with interest every 3 months, then it will issue a 2020 Form 1099-INT for the 3 months that interest is "constructively" received through 10/25/20, and interest earned for the remainder of 2020, not constructively received by 12/31/20, will be included on the 2021 Form 1099-INT.

me1004 | May 4, 2020 | 1,379 posts since 2010

In considering this, you also need to consider how the compounding will work -- keep a close eye on the APY. There are banks, such as Pacific City Bank, a Korean bank in California, that pay what is called "simple interest," all at end of the term on a 1-year CD. There is no compounding over the course of the year; the rate and the APY will be the same. Many banks and CUs compound only the interest that has been posted, not the interest that has accrued.

ratefinder | May 5, 2020 | 52 posts since 2020

Thanks CD and me for your responses.
Given how low interest rates are, the compounding has a minimal impact especially on short term CD but your point, Me1004, is well taken. I'll take a look at Pacific City. Thx.
CD, that was quite helpful and extensive. Since the bank determines whether they will provide a 1099-INT, then I still believe it complies with IRS rules since any deferment is based on maturities of 1 year or less. I have only found Ally, Banesco and BMO Harris will credit interest at maturity as most banks compound daily and credit monthly. Finding banks that will credit at maturity has been quite difficult.
Thanks again.

ratefinder | May 5, 2020 | 52 posts since 2020

Edit: BMO Harris will credit at maturity on less than 1 year. 1 year or greater credits quarterly.

The financial institution, product, and APY (Annual Percentage Yield) data displayed on this website is gathered from various sources and may not reflect all of the offers available in your region. Although we strive to provide the most accurate data possible, we cannot guarantee its accuracy. The content displayed is for general information purposes only; always verify account details and availability with the financial institution before opening an account. Contact [email protected] to report inaccurate info or to request offers be included in this website. We are not affiliated with the financial institutions included in this website.