To attract customers, many financial institutions offer sign-up bonuses and low-rate interest on checking accounts. Individuals frequently ask whether to pay taxes on checking accounts, as misfiling can have serious consequences.
You must know how a checking account tax works to get this answer. Knowing this will also help you file taxes without making errors. Checking accounts are great options for depositing and withdrawing funds. Customers must pay taxes on the interest from their checking account.
The Internal Revenue Service (IRS) requires checking account holders to report their monthly income amount. An individual must add the amount he received from the interest earned from the checking account. However, there are several ways the checking account holders can use to lower the taxes paid on earned interest.
Let’s learn whether every checking account holder needs to pay taxes or if there are any exceptions:
Are there any Checking Account Tax Exemptions?
Unfortunately, checking account holders in every bank must pay taxes. No checking account tax exemptions; everyone must report the earned interest as an income. However, banks will sometimes give you a tax form for the payment.
They only provide the 1099-INT form to customers who have earned more than $10 interest from their checking account. The I099-INT form will let you know the interest from your checking account.
Did your bank forget to send you the tax form? It doesn’t mean you can avoid paying the taxes. If you don’t pay timely, the bank can send the 1099-INT form to the IRS and charge penalties.
Do You Need to Report Less than $10 Interest Income to the IRS?
Many people ask if they have to report and pay taxes on their checking account if they have earned less than $10 in interest. We recommend reporting all income, even if you made $5 in interest from the checking account. It will help you to stay compliant with tax laws, avoiding legal consequences.
Why is Interest from a Checking Account Taxable?
It is essential to mention that interest is a form of income, which is taxable even if the amount is small. However, banks don’t always count all earned interest as taxable income. You must know that every checking account doesn’t earn interest as they are for short-term deposits.
Some checking accounts offer an interest rate, which ultimately helps the customers add $10 or more to their bank balance. Remember that you don’t have to pay the taxes on deposits. Consult with a financial expert to know whether you must pay taxes on your checking account.
Does Every Checking Account Earn Interest?
It is important to clarify that checking accounts don’t usually earn interest. Hence, every checking account holder doesn’t make any income from this. However, some banks offer interest on checking accounts.
You must know about the annual percentage yield (APY) and the interest earned by depositing money into the account. Almost all savings accounts receive an APY, but only a few checking accounts have it. The higher the APY, the faster your funds will grow.
Banks offer a small amount of APY to the checking account holders. Most customers receive a 0.01% APY from their checking account. If you have an average checking account balance of $100,000, you will receive $10 in interest annually.
Do you have $10,000 or more checking account balance? You will earn one dollar for a 0.01 % APY interest rate. Note that these figures might vary depending on your monthly/annual income and how much interest you earn.
Different banks set different interest-eligibility criteria. So, you must contact the bank authorities to know the interest rate on a checking account.
What Should You Know Before Paying the Taxes on a Checking Account?
You will receive the taxable interest every year after opening a checking account. Account holders must count how many interest payments they have received when filing taxes. If you get an increment in your workplace in the same tax year, you must also add it. Income derived from your checking account is considered “other income”.
Are there any Exemptions?
Many people need to be made aware of the exemptions when paying taxes on the interest they earn from their checking accounts. One exemption is for the account holders who earn $10 interest. Your income derived from the checking account is not payable in such an instance.
Another exemption is that you can withdraw the interest from the checking account without paying penalty charges. However, the same rule doesn’t apply to other bank account types like Individual Retirement Account (IRA) or Certificate of Deposit (CD).
Note that the interest payment method varies from one financial institution to another. Thus, you must check your bank’s checking account terms and conditions to avoid potential problems. If you have queries regarding the account terms, clear them from the bank executives.
Where Can You Get the 1099-INT Form?
Your financial institution will send you a Copy B of 1099-INT if your total interest income is $11 or above. However, you must download this form from the IRS website if the bank doesn’t send it. Ensure to provide the correct details when filling out the 1099-INT form.
In this form, the IRS requires you to provide details like your checking account number, interest income, and tax-exempt interest. Additionally, you must add the early withdrawal penalty amount and total investment expenses in the tax form.
Depending on your taxable income amount, you might also receive additional 1099 forms like 1099-OID. Fill it correctly with the required information and return the form to your bank, where you have a checking account.
Easy Steps to Pay Taxes on Your Checking Account:
Financial institutions won’t fill up your tax form, and you must do it after receiving it and filing it promptly. Have you filed and paid your taxes before? We are sure you know it is not that difficult and can be done without external assistance.
Here are the steps you must follow to pay taxes on your checking account:
Calculate the Amount of Interest You Have Earned
Determining how much interest you have received from your checking account is essential. Open your bank’s online portal and check the bank statement for the interest amount. Alternatively, you can visit the nearby bank branch or email them for help.
Read and Fill Out the Tax Form
You must read the tax form before filling it out after checking how much you need to pay. Locate the taxable income amount box and enter the amount. Additionally, you must write the correct taxable interest amount in the blank box. Fill in the rest as required and double-check the information before filing your tax return.
Pay the Due Amount
Pay the due amount to the IRS after filing and paying the tax. However, the due amount will vary between checking account holders. If you need help with the payment, contact the tax advisor.
Late payments can incur penalties, so you must always file it timely. The IRS will check all the details and settle your tax dues. You can use the Direct Pay option from your checking account to simplify the tax filing process.
How Can You Lower Your Monthly Tax Bill?
There are several ways to lower the tax amount you pay every year. You can open tax-exempt or tax-deferred accounts to deposit or withdraw money.
Traditional IRAs are the best option to grow your money faster. Roth IRA is another tax-free account which lets you withdraw money easily. So, choose the correct account type and remove the hassle of paying yearly taxes.
