Will You Owe Taxes if You Got a Bank Bonus?

One of the big perks of switching bank accounts is that many financial institutions sweeten the deal with a welcome bonus. Some banks offer several hundred dollars to lure you away from the competition. Bonuses are especially common for checking accounts, though they're not unheard of for savings accounts.

But with most types of income, the Internal Revenue Service (IRS) wants to know about it -- and bank bonuses are no exception. Keep reading to learn how bank bonuses are taxed.

Will you owe taxes on a bank bonus?

Unfortunately, the answer is yes. When you earn a bank welcome bonus, it's considered taxable income.

Buried in the fine print of the agreement, there's probably a statement about how you're responsible for any applicable federal, state, or local taxes. Depending on the institution, you may receive IRS Form 1099-INT or Form 1099-MISC. Your bank is supposed to send you one of these forms if you earned more than $10 between interest and bonuses during the tax year. But even if you don't get a form, you're still responsible for reporting it on your tax return and paying the applicable tax bill.

Oh, and speaking of interest: The interest you earn on any bank accounts and certificates of deposit (CDs) is also taxable. That may not have been a big deal back when interest rates were close to zero. But with many top high-yield savings accounts paying 5% APY or even higher, the tax bill can come as quite a shock.

Since bank bonuses and interest are considered ordinary income by the IRS, you'll be taxed in your regular income tax bracket. Tax rates range from 10% to 37%, depending on your overall income.

Are credit card bonuses taxable?

Most credit card bonuses aren't taxable because you have to spend money to earn them. For example, I scored 75,000 Miles bonus miles by getting the Capital One Venture X Rewards Credit Card in 2023. But I had to spend $4,000 on my card in the first 3 months to qualify.

The IRS treats such bonuses as a rebate for spending and doesn't require you to pay taxes on them. If you get a bonus from a bank or credit card company that doesn't require you to spend money, it's usually taxable.

Since most bank bonuses don't have a spending requirement, you have to pay taxes on that money. The same goes if you earn money from referral bonuses by getting your friends and family to sign up for a credit card or bank account using your personal link. You don't have to spend anything to get the bonus, so the IRS expects you to pay up.

How much to set aside for taxes on a bank bonus

Getting a bank bonus can be a sweet financial windfall, even if it is taxable. If you want to be sure you're prepared for the tax bill, look up your marginal tax rate, often referred to as your tax bracket, then set aside the appropriate percentage in your savings account.

Say, for instance, that you're a single filer earning $50,000 a year in 2024. That puts you in the 22% tax bracket, which means you pay 22% on the last dollar you earn. If you got a $300 bank bonus, you'd set aside $66 in your savings account to pay the IRS when you file your tax return. Then you can pocket the remaining $234 to spend however you'd like.