The onset of tax season in the United States brought with it a familiar yet novel sight for many: 1099-INT forms detailing taxes owed on bank account interest—a concept unfamiliar to some taxpayers.
Given the prolonged period of low interest rates over the past two decades, many individuals earned minimal interest on their bank deposits. However, interest rates surged in 2022 and the first half of 2023 amid the Federal Reserve’s efforts to combat inflation. Consequently, savings accounts now commonly offer interest rates exceeding 5%, a stark contrast to the near-zero rates experienced for years.
This increase in interest rates has prompted numerous inquiries about bank-account tax forms, according to Matthew Cordes, a tax preparer based in Indiana. He notes a sense of confusion among some individuals, with misconceptions arising regarding the taxation of interest.
Despite popular misconceptions, any interest earned is technically taxable. However, banks are mandated to issue 1099-INT forms only if the interest exceeds $10.
To contextualize this threshold, consider that at an interest rate of 0.06%, typical of many savings accounts until recently, an individual would have needed a balance exceeding $16,000 throughout the year to accrue $10 in interest. In contrast, a 5% interest rate means that a mere $200 in the account can generate $10 in interest.
The influx of 1099-INT forms this year signifies an increased number of individuals tasked with reporting interest on their tax returns.
IRS statistics reveal a notable uptick in the issuance of these forms, with banks sending out over 155 million 1099-INT forms in 2022. This year, the agency anticipates distributing more than 183 million forms.
Projections from the Congressional Budget Office indicate a substantial rise in reported taxable interest, with taxpayers expected to declare $327 billion in taxable interest in 2024, compared to $237 billion in 2019.
The process of reporting this income is relatively straightforward. Taxpayers can provide the 1099-INT form to their tax preparer or input the relevant information into tax preparation software. Those who handle their tax filings independently simply need to transfer the total taxable interest amount from the form to line 2 of their 1040 tax form, beneath their wages, under the section labeled “taxable interest.” This amount is then added to their overall taxable income to determine their tax liability.
For some individuals, particularly retirees reliant on fixed incomes, the tax implications can be significant. Matthew Cordes highlights cases where clients, primarily retirees with substantial savings in interest-bearing certificates of deposit, have been caught off guard by sizable tax bills stemming from interest earnings in the thousands of dollars.
Despite the unexpected tax burden, Cordes suggests that the increased interest earnings more than compensate for the surprise tax liability, emphasizing that earning more money is always a positive outcome.