Tax season is coming up and it's time to report your income, but how do you report interest income? Or income from gifts and bank bonuses?
Did you take advantage of bank account or credit card sign-up bonuses? Or, maybe you’ve been running around chasing the highest savings and CD rates. For the fear of getting in trouble with the IRS, here’s what should be reported during tax season.
One area of tax return preparation that stumps many taxpayers involves the interest, bonuses, and gifts received from banks and credit card companies.
Many perks from these financial institutions have to be reported as income - affecting your tax liability.
Form 1099-INT is the tax document issued by banks and payers of interest - copies are furnished to you and the IRS. Financial institutions are required to send out Form 1099-INT if they paid you $10 or more in interest.
But, even if you didn’t receive Form 1099-INT, you still have to report any taxable interest income for the year.
Anyone who owns long-term CDs may find it tricky when it comes to reporting interest on CDs.
Although a CD may not reach maturity for several years, the bank may send you Form 1099-INT in every year that the CD is earning interest.
You may not receive the interest payout until after maturity, but you will be required to report interest earned.
The exception to reporting annual CD interest is if you own IRA CDs, where earnings will be reported according to the type of IRA.
Many banking customers who opened a new bank or credit card account with a sign-up bonus offer will realize that they received Form 1099-INT for that amount of that bonus.
If you jumped on the cash bonus for opening a Chase checking account or the Discover More Card cash back bonus, the bonuses are considered taxable interest income.
If your bank has a referral program (e.g., Ally Bank) that pays you for completed referral sign-ups, the referral commission is also reported on Form 1099-INT.
On a side note, cash back and reward points earned on credit and debit card purchases are not considered taxable interest.
The days of banks offering crock pots and toasters for new accounts are behind us as tech gadgets begin attracting more allure. Even back then, these noncash gifts could be reported to the IRS as taxable interest income.
According to IRS Publication 550 Investment Income and Expenses:
“If you receive noncash gifts or services for making deposits or for opening an account in a savings institution, you may have to report the value as interest.
For deposits of less than $5,000, gift or services valued at more than $10 must be reported as interest. For deposits of $5,000 or more, gift or services valued at more than $20 must be reported as interest. The value is determined by the cost to the financial institution.”
Simon Zhen is the chief research analyst for MyBankTracker and an expert on consumer banking products, bank innovations, and financial technology. Simon has contributed and/or been quoted in major publications and outlets including Consumer Reports, American Banker, Yahoo Finance, U.S. News - World Report, The Huffington Post, Business Insider, Lifehacker, and AOL.com. Education: Education: B.S. in Health Sciences from Stony Brook University.
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