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Welcome to This Week on Reddit, our weekly series that answers redditors’ biggest banking questions. Each week, our editors choose an interesting and relevant user question to examine. Read on for our expert analysis.
To attract new customers, some banks may sweeten the deal by offering a cash bonus for opening a new account. Often, these bonuses can be a few hundred dollars.
But it’s not entirely free money. New bank account bonuses often come with their own set of terms and conditions, as well as tax implications, as one redditor has learned. Let’s take a closer look.
Reddit user PenguinPoe asked the following question earlier this year:
Overall, the consensus among respondents was that the IRS considers bank account bonuses to be taxable income. As a result, the original poster should receive a tax form from their bank detailing how much to report.
As user AverageAlleyKat271 explained, “A sign up bonus with a bank is taxable just like the interest the account earns all year. Next year you will get a 1099 INT for the bonus and interest the account earns.”
Let’s unpack this a bit more.
Bank bonuses often require you to meet certain conditions to qualify. For example, you may need to set up a monthly direct deposit of at least $1,000 within 30 days of opening your account in order to receive a bonus.
But once that bonus hits your bank account, it’s your money to use as you wish, regardless of whether you’ve filed your taxes for that year.
When tax time does roll around, bank bonuses are typically taxed as interest income. If the bonus is more than $10, your bank or credit union should send you a Form 1099-INT or Form 1099-MISC, which you’ll use to report that income on your tax return.
This is also true of any interest income you earn on your bank accounts during the year, including checking, savings, money market, and CD accounts. Interest is considered income, and it needs to be reported on your tax return.
Keep in mind that even if you don’t receive a 1099, you aren’t off the hook. All income needs to be reported regardless of whether or not your bank sends the appropriate forms.
As far as the amount of tax you can expect to pay on the bonus, it will depend on your tax bracket and effective tax rate.
As your income increases, portions of it are taxed at progressively higher rates. For the 2024 tax year, the federal income tax brackets for single filers are as follows:
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10% bracket: $0 to $11,600
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12% bracket: $11,601 to $47,150
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22% bracket: $47,151 to $100,525
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24% bracket: $100,526 to $191,950
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32% bracket: $191,951 to $243,725
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35% bracket: $243,726 to $609,350
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37% bracket: $609,351 and up
It’s important to note that moving into a higher tax bracket doesn’t mean all your income is taxed at the higher rate. Instead, only the income within each bracket is taxed at that bracket’s rate.
So, for example, say you had taxable income of $60,000 in 2024. The first $11,600 is taxed at 10%, the next $35,550 is taxed at 12%, and the last $12,850 is taxed at 22%. In this example, your marginal tax rate — the rate applied to the last dollar earned — is 22%. However, your effective tax rate — which is the total tax divided by total income — is about 13.76%.
Learn more: 2024-2025 federal income tax brackets and rates
Finally, say you take your new bank account bonus and deposit it into a high-yield savings account. That bonus will begin to accrue interest along with the rest of your account balance. So, you’ll need to report that earned interest for the year on your tax return as well.
It’s important to note that the principal balance of your savings account is not subject to tax since you already paid taxes on that money before depositing it. It’s only the interest you earn on your savings account balance that is taxable.
Bank account sign-up bonuses can be a great way to boost your total savings, but they should be considered an added perk of an already great account that meets your needs.
Before you open a new account with a bonus in mind, read the fine print and be sure you understand the terms and conditions of that bonus. Typically, there are some strings attached — whether it’s meeting minimum balance requirements, keeping your account open for a certain period of time, setting up direct deposit, etc. — in order to qualify for the bonus.
Read more: 16 new bank account bonuses available today