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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 completely free money. New bank account bonuses often come with their own terms, 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 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 at a bank is taxable just like the interest the account earns throughout the year. Next year you get 1099 INT for the bonus and the interest on the account.”

Let’s unpack this a bit more.

Bank bonuses often require you to meet certain conditions to qualify. For example, you may need to make a monthly direct deposit of at least $1,000 within 30 days of opening your account to receive a bonus.

But once the bonus hits your bank account, it’s your money to use however you want, regardless of whether you’ve filed your taxes for that year.

When tax time rolls around, bank bonuses are usually 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 will use to report that income on your tax return.

This also applies to any interest income you earn on your bank accounts during the year, including checking, savings, money market and CD accounts. Interest is counted as income and must be reported on your tax return.

Keep in mind that even if you don’t get a 1099, you’re not off the hook. All income must be reported regardless of whether your bank sends the appropriate forms or not.

As for how much tax you can expect to pay on the bonus, it will depend on your tax bracket and effective rate.

As your income increases, parts of it are taxed at progressively higher rates. For the 2024 tax year, the federal income tax brackets for single persons are as follows:

• 10% bracket: $0 to $11,600

• 12% bracket: $11,601 to $47,150

• 22% bracket: $47,151 to $100,525

• 24% bracket: $100,526 to $191,950

• 32% bracket: $191,951 to $243,725

• 35% bracket: $243,726 to $609,350

• 37% bracket: $609,351 and up

It is important to note that moving into a higher tax bracket does not mean that all of your income is taxed at the higher rate. Instead, only the income within each bracket is taxed at that bracket’s rate.

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 total tax divided by total income – is about 13.76%.

Read more: 2024-2025 federal income tax brackets and tax rates

Finally, say you take your new bank account bonus and deposit it into a high-yield savings account. That bonus will start accruing interest along with the rest of your account balance. So you must report the interest earned for the year on your tax return as well.

It’s important to note that the principal balance in your savings account is not subject to tax because you already paid tax on that money before you deposited it. Only the interest you earn on your savings account balance is taxable.

Sign-up bonuses for bank accounts can be a great way to increase your total savings, but they should be considered an added benefit to an already good account that meets your needs.

Before opening a new account with a bonus in mind, read the fine print and make sure you understand the terms of the bonus. Usually there are certain conditions attached – whether it’s meeting minimum balance requirements, keeping your account open for a certain amount of time, setting up direct deposit, etc. – to qualify for the bonus.

Read more: 16 new bank account bonuses available today