Bank Bonuses, Interest May Boost Tax Bill

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With tax season in full swing, you may be consolidating the various charitable donation receipts, deductions, and W-2 forms that you’ll submit to the Internal Revenue Service (IRS). But if you received any bank sign-up bonuses or earned interest on your bank balance, you may owe additional taxes you might not have planned for.

Interest rates on bank accounts, such as high-yield savings accounts, were high in 2022 due to ongoing rate increases made by the Federal Reserve. Bank sign-up bonuses and promotions have also been high, often $100 or more. The IRS sees bonuses and interest as additional income, which means the government has to take its cut.

What’s the Tax Rate for Bank Interest and Bonuses?

Interest from savings accounts is taxed at the same rate as your income, which is in the range of 10 percent to 37 percent in the United States in 2023. If you’ve earned interest, your bank may send you a 1099-INT tax form. These forms are issued by businesses that offer interest, such as banks, and they let you know how much you owe for taxes on your earned interest.

Bank bonuses are typically taxed the same way, although you might receive a 1099-MISC form instead of, or in addition to, a 1099-INT form. Sometimes, however, banks don’t send out forms at all. “Not all financial institutions send out 1099s for bank bonuses,” said Matt Bundrick, co-founder of BankBonus.com, by email. “However, this does not relieve you from your obligation to include them on your tax return.”

If you’ve earned a bank sign-up bonus or interest but haven’t received any tax forms, you can add that income to a 1040 form, which allows tax filers to list any additional income they’ve received, such as prize winnings, jury duty pay, alimony and other non-1099 or non-W-2 earnings. If you’re using tax software, you may be prompted to add additional income in your form submission, and the software will tell you how much you owe as a result of the information in your filing.

If you forgot to add something to your tax filing, you could reach out to the IRS to amend your tax return.

What’s the Tax Difference Between Bank Bonuses and Credit Card Bonuses?

The IRS doesn’t require that taxes be paid on credit card bonuses because those bonuses are categorized as rebates on spending, not as income.

Credit card bonuses can typically only be earned by spending a certain amount, usually within a time frame such as three months.

How Can I Be Smart With My Bank Account Interest and Bonuses?

If you’re receiving a bonus or interest on your bank balance, it’s a good idea to set aside a percentage of your earnings for taxes in advance so you can cover your tax obligations. For peace of mind, it can be helpful to keep your tax money somewhere you won’t access it, such as in a separate savings subaccount set aside for taxes.

“I recommend that clients keep a log of their interest, dividends and bonuses throughout the year so as not to be surprised when they receive these statements,” said Walter Russell, CEO of financial advisor firm Russell and Company, via email. “Some of my clients pay quarterly estimated taxes so that the tax burden is lighter come tax season.”

If you try to earn multiple bank account sign-up bonuses by frequently opening new accounts and moving money among accounts to earn a bonus, you’ll likely owe more taxes simply because you earned more money.

In addition to taxes, there are other details about bonuses that you’ll want to keep in mind.

“Know the terms of the bonus before signing up,” Bundrick said. “This will help you avoid any headaches down the road. The last thing you want is to be wondering where your bonus is, only to find out you forgot to include the promo code on your application or otherwise didn’t qualify.”

Taxes are due by April 18 this year, so don’t forget to look into tax obligations concerning your bank account while you compile your forms. Underreported income—even by accident—can lead to an audit by the IRS or even create legal problems such as tax fraud charges. If you can stay on top of your paperwork and pay the taxes you owe, you should be able to get through tax season smoothly, on top of earning more on your bank account.

By Chanelle Bessette of NerdWallet

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