The past few years have been banner years for earning interest on everything from high-yield savings accounts to CDs and other interest-earning financial products. With banks and institutions offering sometimes as much as 5% APY, many Americans have been able to passively grow their wealth.
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While passive income is a very welcome thing, as tax time rolls around, there are some important things you need to know about that interest, so you aren’t caught off guard owing more money than you expect and other considerations.
Mark Gallegos, a CPA with a master’s in science and taxation and a tax partner with Porte Brown, LLC, explained six things you need to know about that interest you earned this year.
While your interest may feel like extra money you can keep all to yourself, don’t forget that the IRS would like its cut first (and some states as well).
“Interest income is considered taxable income by the IRS. This means you must report it on your federal income tax return regardless of whether the interest is from a traditional or a high-yield account,” Gallegos said.
Depending on just how much you earned, if you haven’t put aside extra to account for this, you could be smacked with a tax bill.
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Depending on where you live, Gallegos said your state might also tax your interest income.
“So you want to check what’s the reportable requirements for your state.”
Don’t confuse your earned interest with tax-exempt interest, such as what you earn from a municipal bond, he said. “That gets reported on Schedule B and goes to a line on a 1040 form that says tax exempt income and you’re not taxed on it.”
If you earned more than $10 in interest from anything like a CD, bank account, brokerage account, money market, bonds or so on, you should receive an IRS form known as a 1099-NT. This form shows the IRS how much each of these institutions paid you. You will file this with your taxes. However, keep in mind that if, for any reason, you do not receive that 1099-NT but you did earn interest, you still need to report it on your taxes.
“So for example, one bank may give you an interest form that shows, hey, I got a $100 dollars of interest and maybe another bank, you only earn $6. That bank that you earned $6 from is not required to send you a 1099-INT. However, you should report the $6 from that bank on your tax returns,” Gallegos said.
