Bank of America is withholding federal income tax on my interest-bearing checking account. They told me this is a federal law. Is that correct?
The answer to your question is “it depends.” Without knowing your specific situation, I can only provide you with an overview of the IRS position on this matter.
Most often, if you are a U.S. resident, federal taxes are not withheld on your interest income. You would, however, report the interest earned on your Form 1040 and the appropriate tax would be calculated based on your income bracket. The exception is called back-up withholding, and it is 24% of the interest income. So, if you received $100 of interest on your Form 1099-INT, the bank withheld and remitted the tax of $24 to the IRS on your behalf, and you will see the withholding amount in Box 4 of the Form 1099-INT.
There are five reasons why a bank would be required to withhold on your interest payments:
- You did not furnish your tax identification number (TIN) to the bank when asked.
- You did not certify your TIN by signing on the certification line in Part II of Form W-9.
- The IRS has sent a notice to your bank informing it that the TIN you provided was incorrect.
- The IRS sent you a notice that you were subject to back-up withholding because it found that you omitted certain investment income from your tax return.
- You responded to the notice discussed in point 3, but failed to certify the documentation. Back-up withholding can also be charged to certain nonresident aliens who are not required to file a U.S. tax return.
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Answered by: Michael G. Radich, CPA, MST, is managing shareholder with MGR CPA & Consultants PC in Pittsburgh, Pa.