It may come as no surprise, but the IRS taxes the interest paid to you on your basic deposit accounts as taxable income. Financial institutions that pay you more than $10 in interest (or dividends as they are called at Greater Nevada Credit Union) on your deposits in a given year are required to report that amount by filing a Form 1099-INT. Even if you do not receive a copy of the 1099-INT filed by your financial institution, the IRS still expects you to report the interest income earned. If you have not yet filed your 2013 tax returns (and even if you have), it may help you cover your bases to be aware of some tax policies that affect your basic deposit accounts.
Checking, Savings, and Money Market Account Dividends
Dividends earned on your Checking, Savings, and Money Market accounts at a credit union are considered ordinary income, as would interest earned on those same accounts at a standard bank. (Dividends paid by credit unions on deposits can be confused with dividends paid at the end of the year by a mutual fund or corporation, for example. If a credit union issues the latter type of dividend, you should receive a Form 1099-DIV, which treats those dividends differently than interest income. For the purposes of this article, we are only using the term ‘dividends’ to describe interest income).
The IRS taxes interest income at your highest marginal tax rate, meaning that the higher the bracket your taxable income reaches, the higher the rate at which your dividends will be taxed. Taxable interest (as opposed to tax-deferred interest, covered below) income below $1,500 can simply be reported on Form 1040A or 1040EZ, but income over $1,500 must be reported on Schedule B.
Share Certificate Dividends
Dividends earned on Share Certificates (or Certificates of Deposit) are also considered ordinary income. GNCU offers certificates ranging in terms from 3 months to 5 years, and typically credits dividends to the certificates on a compounded basis every month. The IRS requires any dividends earned within a given tax year to be reported as income on a 1099-INT. Even if the dividends you earn are added back to your certificate principal, you must report them for the tax year in which they were added.
If the credit union doesn’t pay dividends until maturity on a certificate with terms over one year, you are required to file a 1099-OID each tax year during the life of the certificate. An OID (Original Issue Discount) is a part of the total dividends you are due upon the maturity of the certificate and is considered taxable interest income even though you haven’t actually received it. Check out IRS Publication 550 for more details.
Interest you earn on funds in a tax-deferred account, such as an IRA or an IRA CD, will not be reported as taxable income as long as it remained in a tax-deferred account for the entire tax year or was disbursed as a qualified distribution. Many folks find IRAs advantageous because they allow taxpayers to be more strategic with when and how they pay taxes on their interest income.
Filing Separately with a Joint Deposit Account
If you are a holder of a joint deposit account and are filing separately from the other account holder (or holders), you will have to do a little more work to share the tax liability created by any interest income. A simple process that includes an additional form is usually all it takes, and completing it could help you avoid having to owe (or being owed by) someone after you file your tax returns.
Hopefully, the above review will help you take care of any reporting requirements associated with interest income that may have accrued in one or more of your basic deposit accounts. Be sure to speak to a tax professional along the way if you have any questions or complications – he or she will help you avoid what could be a time-consuming (and costly) audit from the IRS.
Patrick Russo writes for DepositAccounts.com, a site that publishes extensive data on over 14,000 banks and credit unions nationwide, as well as comprehensive information covering banking trends and savings strategies.