# tax theory Q: why is a savings account bonus considered as interest? **URL:** \ **Category:** Factual Questions\ **Created:** [February 20, 2019, 8:39pm UTC](https://boards.straightdope.com/t/tax-theory-q-why-is-a-savings-account-bonus-considered-as-interest/829921 "2019-02-20T20:39:22Z")\ **Posts on this page:** 19\ **Page:** 1
**Author:** ![CC](https://avatars.discourse-cdn.com/v4/letter/c/f1d935/32.png) [@CC](https://boards.straightdope.com/u/CC)\ **Post date:** [February 20, 2019, 8:39pm UTC](https://boards.straightdope.com/t/tax-theory-q-why-is-a-savings-account-bonus-considered-as-interest/829921/1 "2019-02-20T20:39:22Z")
I’m curious as to why a $200 bonus I received for having opened a savings account is treated as interest. Interest on what? Certainly not on my deposit, otherwise I’d be eligible for it every year. I don’t know about tax law, but I’m wondering if any gift I get has to be declared as income. What if a guy in the neighborhood wanted to give me $200 for having, say, a pretty lawn. Would I have to declare that as income? What if my older son wanted to give me $200 for being a great dad? Clearly, the bank sends me an 1099-INT form, so it’s considered income as far as the IRS is concerned. It just seems sort of hinky to me. I need lots of educating here, obviously. Not tax advice. But what’s the deal? Thanks, Dopers. xo, C. ---
**Author:** ![Riemann](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/riemann/32/3133_2.png) [@Riemann](https://boards.straightdope.com/u/Riemann)\ **Post date:** [February 20, 2019, 8:43pm UTC](https://boards.straightdope.com/t/tax-theory-q-why-is-a-savings-account-bonus-considered-as-interest/829921/2 "2019-02-20T20:43:39Z")
Taxation of _bona fide_ gifts has specific treatment that differs from income. However, a “bonus” like this is not a gift. It’s not the exactly same as interest, but it’s still a commercial _quid pro quo_. The bank is not giving you the bonus for nothing because they think you’re a nice guy, they are giving it to you in return for opening an account. So it’s treated as income and taxed the same as interest income. A moment’s thought should show you why this has to be the case. If it were not, borrowers would never pay interest on bonds or deposits, they would just issue an annual “bonus”. You don’t change the character of something for tax purposes by simply renaming it. ---
**Author:** ![CC](https://avatars.discourse-cdn.com/v4/letter/c/f1d935/32.png) [@CC](https://boards.straightdope.com/u/CC)\ **Post date:** [February 20, 2019, 9:16pm UTC](https://boards.straightdope.com/t/tax-theory-q-why-is-a-savings-account-bonus-considered-as-interest/829921/3 "2019-02-20T21:16:46Z")
I appreciate your response, but I think I’ll need more than a moment to think about it. I’m not trying to be obtuse - I just am. So borrowers issue a bonus, not interest. What would be the significant difference? I let him use some money, he does something with it and pays me for loaning it to him. What difference does it make if he calls it interest or a gift? The character of the payment to me is the benefit I gain from letting him use my money for a while. ---
**Author:** ![KneadToKnow](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/kneadtoknow/32/3999_2.png) [@KneadToKnow](https://boards.straightdope.com/u/KneadToKnow)\ **Post date:** [February 20, 2019, 9:21pm UTC](https://boards.straightdope.com/t/tax-theory-q-why-is-a-savings-account-bonus-considered-as-interest/829921/4 "2019-02-20T21:21:18Z")
> [@CC](#): > > I appreciate your response, but I think I’ll need more than a moment to think about it. I’m not trying to be obtuse - I just am. So borrowers issue a bonus, not interest. What would be the significant difference? I let him use some money, he does something with it and pays me for loaning it to him. What difference does it make if he calls it interest or a gift? The character of the payment to me is the benefit I gain from letting him use my money for a while. I believe **Reimann** was responding to your hypothetical “guy in the neighborhood [who] wanted to give me $200 for having, say, a pretty lawn,” showing why you have to treat a bonus from the bank as income but not necessarily a gift from a neighbor. ---
**Author:** ![Riemann](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/riemann/32/3133_2.png) [@Riemann](https://boards.straightdope.com/u/Riemann)\ **Post date:** [February 20, 2019, 9:26pm UTC](https://boards.straightdope.com/t/tax-theory-q-why-is-a-savings-account-bonus-considered-as-interest/829921/5 "2019-02-20T21:26:23Z")
> [@CC](#): > > I appreciate your response, but I think I’ll need more than a moment to think about it. I’m not trying to be obtuse - I just am. So borrowers issue a bonus, not interest. What would be the significant difference? I let him use some money, he does something with it and pays me for loaning it to him. What difference does it make if he calls it interest or a gift? The character of the payment to me is the benefit I gain from letting him use my money for a while. I’m saying that it makes no difference at all for tax purposes whether a borrower _calls_ it interest or a “bonus” or a “gift”. If it’s a commercial _quid pro quo_, it’s taxed just the same, as income. _Calling_ something a gift does not make it so for tax purposes, what makes something a gift depends on whether it satisfies the IRS definition of a gift. ---
**Author:** ![Riemann](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/riemann/32/3133_2.png) [@Riemann](https://boards.straightdope.com/u/Riemann)\ **Post date:** [February 20, 2019, 9:34pm UTC](https://boards.straightdope.com/t/tax-theory-q-why-is-a-savings-account-bonus-considered-as-interest/829921/6 "2019-02-20T21:34:15Z")
ETA: It’s impossible to imagine _any_ payment from a financial institution to a customer ever being treated as a gift for tax purposes, since they are not in business to give money away without expecting anything in return. And it doesn’t matter whether the _quid pro quo_ is explicit. I once got a free golf club from a brokerage for being a good customer - and sure enough, the value of it shows up as taxable income on the 1099. ---
**Author:** ![Ramira](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/ramira/32/344_2.png) [@Ramira](https://boards.straightdope.com/u/Ramira)\ **Post date:** [February 20, 2019, 9:52pm UTC](https://boards.straightdope.com/t/tax-theory-q-why-is-a-savings-account-bonus-considered-as-interest/829921/7 "2019-02-20T21:52:11Z")
> [@CC](#): > > I’m curious as to why a $200 bonus I received for having opened a savings account is treated as interest. Interest on what? Certainly not on my deposit, otherwise I’d be eligible for it every year. I don’t know about tax law, but I’m wondering if any gift I get has to be declared as income. What if a guy in the neighborhood wanted to give me $200 for having, say, a pretty lawn. Would I have to declare that as income? What if my older son wanted to give me $200 for being a great dad? Clearly, the bank sends me an 1099-INT form, so it’s considered income as far as the IRS is concerned. It just seems sort of hinky to me. I need lots of educating here, obviously. Not tax advice. But what’s the deal? Thanks, Dopers. xo, > C. Without needing to know the American tax regime, it is clearly materially an economic return paid by the deposit taker as an incentive to access the funds (your deposit). It is not merely a gift - it is commercial unlike a genuine gift. In the bank internal accounting, these things are indeed booked in the accounts as a cost of the funds, only different in some mechanics from the interest. Very obviously if the commercial entity could avoid the payment of the taxes (even if on behalf of the receiptient of the income) on such operations by the banal act of labeling a payment as a gift, then there would be the enormous incentive to relabel as gifts. ---
**Author:** ![Ramira](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/ramira/32/344_2.png) [@Ramira](https://boards.straightdope.com/u/Ramira)\ **Post date:** [February 20, 2019, 9:55pm UTC](https://boards.straightdope.com/t/tax-theory-q-why-is-a-savings-account-bonus-considered-as-interest/829921/8 "2019-02-20T21:55:22Z")
> [@Riemann](#): > > ETA: It’s impossible to imagine _any_ payment from a financial institution to a customer ever being treated as a gift for tax purposes, since they are not in business to give money away without expecting anything in return. And it doesn’t matter whether the _quid pro quo_ is explicit. I once got a free golf club from a brokerage for being a good customer - and sure enough, the value of it shows up as taxable income on the 1099. I do not know about the US tax approach, but there are some ways (as like tied to some action or activity of general benefit which the customer is engaged), but it takes an effort to document for the tax authority a disconnection between the commercial interest and the gifting. Which of course makes sense otherwise it would be ridiculously easy to avoid the taxation on various incomes. ---
**Author:** ![Riemann](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/riemann/32/3133_2.png) [@Riemann](https://boards.straightdope.com/u/Riemann)\ **Post date:** [February 20, 2019, 10:03pm UTC](https://boards.straightdope.com/t/tax-theory-q-why-is-a-savings-account-bonus-considered-as-interest/829921/9 "2019-02-20T22:03:43Z")
There’s a Wiki article that describes things pretty well. > **[Gift tax in the United States](https://en.wikipedia.org/wiki/Gift_tax_in_the_United_States)** > > A gift tax, known originally as inheritance tax, is a tax imposed on the transfer of ownership of property during the giver's life. The United States Internal Revenue Service says that a gift is "Any transfer to an individual, either directly or indirectly, where full compensation (measured in money or money's worth) is not received in return." > When a taxable gift in the form of cash, stocks, real estate, gift cards, or other tangible or intangible property is made, the tax is usually imposed on... > [@](#): > > …Although many items might appear to be gift, courts have held the most critical factor is the transferor’s intent. The transferor must demonstrate a “detached and disinterested generosity” when giving the gift to exclude the value of the gift from the taxpayer’s gross income… ---
**Author:** ![CC](https://avatars.discourse-cdn.com/v4/letter/c/f1d935/32.png) [@CC](https://boards.straightdope.com/u/CC)\ **Post date:** [February 20, 2019, 10:22pm UTC](https://boards.straightdope.com/t/tax-theory-q-why-is-a-savings-account-bonus-considered-as-interest/829921/10 "2019-02-20T22:22:32Z")
> [@Ramira](#): > > …Very obviously if the commercial entity could avoid the payment of the taxes (even if on behalf of the receipient of the income) on such operations by the banal act of labeling a payment as a gift, then there would be the enormous incentive to relabel as gifts. I suspected as much. One reason that it’s “interest” is that otherwise the bank would be liable for the tax on the money. ---
**Author:** ![Riemann](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/riemann/32/3133_2.png) [@Riemann](https://boards.straightdope.com/u/Riemann)\ **Post date:** [February 20, 2019, 11:00pm UTC](https://boards.straightdope.com/t/tax-theory-q-why-is-a-savings-account-bonus-considered-as-interest/829921/11 "2019-02-20T23:00:12Z")
> [@CC](#): > > I suspected as much. One reason that it’s “interest” is that otherwise the bank would be liable for the tax on the money. Technically I don’t think it’s usually shown as interest, a promotional bonus would usually show up as 1099-MISC rather than 1099-INT. But it doesn’t make any difference to the tax treatment, they are both taxed as investment income. ---
**Author:** ![CC](https://avatars.discourse-cdn.com/v4/letter/c/f1d935/32.png) [@CC](https://boards.straightdope.com/u/CC)\ **Post date:** [February 20, 2019, 11:21pm UTC](https://boards.straightdope.com/t/tax-theory-q-why-is-a-savings-account-bonus-considered-as-interest/829921/12 "2019-02-20T23:21:18Z")
Got it. Thanks. ---
**Author:** ![CC](https://avatars.discourse-cdn.com/v4/letter/c/f1d935/32.png) [@CC](https://boards.straightdope.com/u/CC)\ **Post date:** [February 21, 2019, 3:52am UTC](https://boards.straightdope.com/t/tax-theory-q-why-is-a-savings-account-bonus-considered-as-interest/829921/13 "2019-02-21T03:52:43Z")
p.s. - By the way\*\* Riemann\*\*, I did get a 1099-INT from the bank. ---
**Author:** ![Melbourne](https://avatars.discourse-cdn.com/v4/letter/m/b5e925/32.png) [@Melbourne](https://boards.straightdope.com/u/Melbourne)\ **Post date:** [February 21, 2019, 11:01pm UTC](https://boards.straightdope.com/t/tax-theory-q-why-is-a-savings-account-bonus-considered-as-interest/829921/14 "2019-02-21T23:01:20Z")
> [@CC](#): > > p.s. - By the way\*\* Riemann\*\*, I did get a 1099-INT from the bank. You might think that, being in the business, banks would get things like this right. You would be wrong. Being in the business, banks would have a computerized system with limited flexibility, run by people following procedures they are not authorized to change, implemented by people who didn’t know what they were doing. When I was in the business, in another country, the tax office expected you to get this kind of thing correct, and could penalize you for it, but actually tended to be fairly lenient unless (a) they had a policy push to correct that error, or (b) you were cheating on tax. And the reason is, of course, that tax is full of exceptions where the obviously correct answer is not in fact the correct answer: maybe the bank has a tax decisions that this is supposed to be reported as interest. ---
**Author:** ![D\_Anconia](https://avatars.discourse-cdn.com/v4/letter/d/67e7ee/32.png) [@D\_Anconia](https://boards.straightdope.com/u/D_Anconia)\ **Post date:** [February 21, 2019, 11:06pm UTC](https://boards.straightdope.com/t/tax-theory-q-why-is-a-savings-account-bonus-considered-as-interest/829921/15 "2019-02-21T23:06:48Z")
> [@CC](#): > > p.s. - By the way\*\* Riemann\*\*, I did get a 1099-INT from the bank. Yes, when I have received a bonus like that from the bank, it was on the 1099-INT. ---
**Author:** ![Great\_Antibob](https://avatars.discourse-cdn.com/v4/letter/g/e47c2d/32.png) [@Great\_Antibob](https://boards.straightdope.com/u/Great_Antibob)\ **Post date:** [February 21, 2019, 11:09pm UTC](https://boards.straightdope.com/t/tax-theory-q-why-is-a-savings-account-bonus-considered-as-interest/829921/16 "2019-02-21T23:09:42Z")
> [@CC](#): > > What if a guy in the neighborhood wanted to give me $200 for having, say, a pretty lawn. Would I have to declare that as income? Just to pipe in on this aspect, you wouldn’t have to declare it, but your neighbor (in theory) would have to report the gift. In practice, small gifts made by individuals aren’t going to chap anybody’s hide. But say you want to give not $200 but $200000. There’s an exemption amount (I think $14k per year?) but everything past that is taxable and the gifter pays, not the giftee. And it should be reported on taxes. One reason for doing it this way is to avoid parents “gifting” entire inheritances but still allowing for gifts that are actually gifts. ---
**Author:** ![Alley\_Dweller](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/alley_dweller/32/430_2.png) [@Alley\_Dweller](https://boards.straightdope.com/u/Alley_Dweller)\ **Post date:** [February 22, 2019, 12:05am UTC](https://boards.straightdope.com/t/tax-theory-q-why-is-a-savings-account-bonus-considered-as-interest/829921/17 "2019-02-22T00:05:26Z")
> [@Great\_Antibob](#): > > Just to pipe in on this aspect, you wouldn’t have to declare it, but your neighbor (in theory) would have to report the gift. In practice, small gifts made by individuals aren’t going to chap anybody’s hide. > > But say you want to give not $200 but $200000. There’s an exemption amount (I think $14k per year?) but everything past that is taxable and the gifter pays, not the giftee. And it should be reported on taxes. One reason for doing it this way is to avoid parents “gifting” entire inheritances but still allowing for gifts that are actually gifts. The 2019 exemption is $15,000 annually per donor/recipient pair. But if you go over that amount, most people only have to file a gift tax return, not actually pay any tax, because each donor has an $11.4 million lifetime gift tax/estate tax exclusion. The portion of the gift over $15,000 (unless it is subject to some other exclusion) will eat away at the donor’s lifetime limit. It’s a popular internet myth that the recipient can’t be held responsible for the gift tax. But if the tax can’t be collected from the donor, the recipient can be made to pay: [IRC§ 6324. Special liens for estate and gift taxes](https://www.law.cornell.edu/uscode/text/26/6324) > [@](#): > > (b) Lien for gift tax > > Except as otherwise provided in subsection (c), unless the gift tax imposed by chapter 12 is sooner paid in full or becomes unenforceable by reason of lapse of time, such tax shall be a lien upon all gifts made during the period for which the return was filed, for 10 years from the date the gifts are made. If the tax is not paid when due, the donee of any gift shall be personally liable for such tax to the extent of the value of such gift. So you can’t just give your kid all of your money, tell the IRS you’re broke, and nobody pays any taxes. ---
**Author:** ![glowacks](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/glowacks/32/5548_2.png) [@glowacks](https://boards.straightdope.com/u/glowacks)\ **Post date:** [February 22, 2019, 12:10am UTC](https://boards.straightdope.com/t/tax-theory-q-why-is-a-savings-account-bonus-considered-as-interest/829921/18 "2019-02-22T00:10:40Z")
Getting a 1099-INT makes it also very clear that it is _not_ self-employment income. Whenever someone gets a 1099-MISC with nonemployee compensation (Box 7), it’s assumed to be self-employment income, whereas things get far more murky when it comes in as “other income” (Box 3 I think). I just saw one the other day where a decedent received a W-2 with Box 3 and Box 5 wages of, let’s say $60,000 and Box 1 Wages of $40,000, then received a 1099-Misc with $20,000 of “other income”. The fact that it was quite obviously the difference between the amount of wages taxed for SS and Med and the amount taxed for income taxes on the W-2 indicated that it clearly should not be considered self-employment income, as he already had paid the payroll taxes on it through the W-2. The client’s next of kin even had an email chain where she asked why the amount she received after the decedent’s death was less than the amount on the 1099-MISC, and the answer was that it was processed as regular payroll and had FICA withheld. Getting back to our regularly scheduled topic, I also received this bonus a few years ago, and I occasionally see clients that have obviously gotten it as well because of their even hundred-dollar amounts of interest. The reason why they can call it interest is that it invariably has a requirement of having some minimum sum deposited in the bank and keeping the account open for so many days. The fact that you could remove almost all the initial deposit and let it sit there with one cent for most of that time doesn’t stop the bank from saying that they are paying interest on your deposit with the bonus; it just happens to not be a fixed rate of interest. They are probably required by law to have these sorts of things attached to the bonuses and are not able to handle it in any way other than interest. If they could just send you a 1099-MISC instead, they wouldn’t have to, because it would be under $600 (although maybe for “other income” the bar is lower). And they already send 1099-INTs to tons of people anyway, so if they just use the same internal account to record the income statement effect of the bonus as they use to record other interest, it comes out in the same batch of 1099-INTs as everyone else’s interest. ---
**Author:** ![Alley\_Dweller](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/alley_dweller/32/430_2.png) [@Alley\_Dweller](https://boards.straightdope.com/u/Alley_Dweller)\ **Post date:** [February 22, 2019, 1:09am UTC](https://boards.straightdope.com/t/tax-theory-q-why-is-a-savings-account-bonus-considered-as-interest/829921/19 "2019-02-22T01:09:28Z")
Citibank awards some bonuses as cash, some bonuses as “Thankyou Points,” and some bonuses as AA frequent flyer miles. Back around 2009, Citibank created chaos in the bank-rewards community by deciding to issue 1099-MISC forms for redemptions of Thankyou Points. No one really knows why they did this. But people got hit with surprise income tax liabilities. The word on the street now is not to redeem more than $600 worth of Thankyou Points in any given year. This actually resulted in two different lawsuits. One was a class action [Hirsch v Citibank](https://hirschairlinemilessettlement.com/), which took a strange detour through the appeals courts about whether Citibank could enforce an arbitration clause in their account agreement. Citibank lost that appeal and eventually the case was settled. Customers with received a 1099-MISC when they redeemed Thankyou Points for FF miles could receive a $245 payment from Citibank. In the other case, [Shankar v. Commissioner, 143 T.C. No. 5 (Aug. 26, 2014)](https://docplayer.net/5412651-143-t-c-no-5-united-states-tax-court-parimal-h-shankar-and-malti-s-trivedi-petitioners-v-commissioner-of-internal-revenue-respondent.html), Shankar redeemed his Thankyou Points for a ticket (rather than frequent flyer miles) and the Tax Court ruled that the value of the ticket was properly includable in income and therefore taxable.