Step-by-Step Guide- How to Properly File Tax on Bank Interest Earnings

How to File Tax on Bank Interest

Filing taxes on bank interest is an essential part of managing your finances and ensuring compliance with tax regulations. Bank interest, whether it’s from savings accounts, certificates of deposit (CDs), or other investment vehicles, is considered taxable income. Understanding how to file tax on bank interest can help you avoid penalties and ensure that you’re accurately reporting your earnings. In this article, we’ll guide you through the process of filing tax on bank interest, from gathering necessary documents to reporting the income on your tax return.

1. Gather Necessary Documents

Before you begin filing tax on bank interest, you’ll need to gather the necessary documents. The most important document is the Form 1099-INT, which your bank will send you at the end of the year. This form will detail the total interest you earned, the amount of tax withheld, and the name of the financial institution that paid the interest. Make sure to keep this form with your tax records for future reference.

2. Determine Taxable Interest

Not all interest you earn is taxable. For example, interest from municipal bonds is typically tax-exempt at the federal level. However, interest from savings accounts, CDs, and other bank accounts is taxable. To determine the taxable interest, subtract any tax-exempt interest from the total interest you earned.

3. Report Interest on Your Tax Return

To report your bank interest on your tax return, you’ll need to use Form 1040 or Form 1040-SR. If you’re using Form 1040, you’ll enter the taxable interest you earned on line 8a. If you’re using Form 1040-SR, you’ll enter the taxable interest on line 8a. Make sure to include the amount of tax withheld from your interest on line 8b.

4. Consider the Tax Withholding

If your bank withheld tax from your interest earnings, you’ll need to report this on your tax return. The amount of tax withheld will be listed on your Form 1099-INT. You’ll enter this amount on line 4 of Form 1040 or line 4 of Form 1040-SR.

5. Adjustments and Credits

If you’re eligible for any adjustments or credits related to your bank interest, make sure to include them on your tax return. For example, if you’re subject to the Net Investment Income Tax (NIIT), you’ll need to report your investment income on Form 8960.

6. File Your Tax Return

Once you’ve completed your tax return and reported your bank interest, make sure to file it by the deadline. If you’re unable to file on time, you can request an extension to file your return, but you’ll still need to pay any taxes owed by the original deadline.

Filing tax on bank interest may seem daunting, but by following these steps and keeping organized, you can ensure that you’re accurately reporting your income and staying compliant with tax regulations. Always consult with a tax professional if you have questions or need assistance with your tax return.