Are Bank Bonuses Taxable?

Sign-up bonuses on bank accounts are a nice perk that can help you level up your personal finances with minimal effort. They also come with tax implications.

If you’ve received any bank account bonuses or earned interest on money in your checking account or high-yield savings account, you can expect the IRS to count it as taxable income.

In this guide, we’ll cover the specifics of how bank bonuses are taxed and provide you with pointers to help you stay compliant with the IRS.

How Do Bank Account Bonuses Work?

First things first, it’s important to understand how bank bonuses work.

Bank bonuses are incentives financial institutions offer to attract new customers or encourage existing ones to engage more with their services.

  • New accounts: A lot of institutions, especially online banks and fintech companies, offer cash bonuses for opening a new account.
  • Referral bonuses: Banks also offer rewards to current accountholders who refer friends and family to sign up for a bank account.
  • Enhanced interest: In some cases, banks offer increased promotional interest rates for a period like 6 months to a year when you open a new high-yield savings account.

Sometimes, banks have additional requirements, like setting up direct deposits or meeting account balance minimums.

Regardless of the specifics, all of the types of bank bonuses described above need to be included in your tax forms.

Whether you receive a bonus for opening a new account or for referring a friend, your bank bonus is considered to be taxable income.

What’s the Tax Rate for Bank Bonuses?

The Internal Revenue Service (IRS) views bank bonuses as additional income. This means that they’re subject to taxation at your usual income tax rate.

According to the IRS, the 2023 federal tax rate ranges from 10% to 37%. Your tax rate depends on which tax bracket you fall into.

How Are Bank Bonuses Taxed?

When you receive a bank bonus, the bank will typically send you a Form 1099-INT or a Form 1099-MISC, which reports the total bonus amount and informs you of how much money you owe in taxes.

It’s important to note that some banks don’t send out 1099-INT or 1099-MISC forms. Even if the bank doesn’t send you a 1099 form, you’re still legally required to report any bonuses you received during the last tax year on your tax return.

If you don’t get a tax form from your financial institution, it’s still a part of your tax liability. When tax time rolls around, be sure to include your bonus as additional income on the 1040 form.

When you use a tax software platform like TurboTax or H&R Block, you’ll likely be asked to enter any additional income beyond your W-2 and 1099 earnings.

How Are Credit Card Bonuses Taxed?

Credit card issuers like Citi, Capital One, Chase, and American Express frequently offer bonuses in the form of points, miles, or cash rewards to draw in customers.

Unlike bank bonuses, credit card bonuses typically aren’t taxed like bank bonuses are. When you get cash back for making credit card purchases, the IRS classifies the rewards as rebates for spending instead of considering them as income.

However, in some cases, you could be responsible for taxes if you receive a sign-up bonus for opening a new credit card.

How to Prepare for Taxes on Bank Bonuses

Paying taxes on your bank bonuses is crucial, but it doesn’t have to be a stressful task. And it definitely shouldn’t deter you from taking advantage of rewarding bank bonuses.

Here are a few pointers to help you get the most out of your bank bonuses and avoid a hectic tax filing experience:

  • Read the fine print: Before you sign up for a new bank account to earn a bonus, it’s important to understand the terms and conditions. Make sure you’re clear on the eligibility requirements and any deadlines associated with the promotion to ensure you qualify.
  • Keep track of your bank bonuses: If you enjoy chasing bank bonuses and find yourself opening multiple accounts throughout the year, take note of all the bonuses as you go. That way, it’ll be easier to save for taxes and know which banks to expect tax forms from ahead of tax time.
  • Save money for taxes: Saving up money ahead of time is a smart move for taxpayers. Set aside enough money to cover your taxes so you won’t have to scramble when tax season comes around. It’s also wise to keep your tax fund separate from your general savings. Some online savings accounts let you set individual savings goals for specific categories like taxes.
  • Stay on top of your taxes: Be mindful of the tax deadline and be sure to file and pay your taxes on time. You should also be careful to accurately report your income from bank bonuses to avoid an audit or legal issues related to your taxes.

Are Bank Bonuses Worth It?

While the idea that bank bonuses are taxable might seem frustrating, it’s important to remember that the benefits of bank bonuses can far outweigh the hassle of paying taxes.

Even after accounting for taxes, you’re likely to come out ahead financially. That being said, it’s always a good idea to consult with a tax professional to understand the full implications of your situation.

By staying informed and keeping track of your bonuses, you can ensure that you’re meeting your tax obligations while still taking advantage of the financial benefits that bank bonuses offer.

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