Tax Reporting of Ally 11 mo. No-Penalty CD

[kaneohe]

I thought I understood this but a rep at Ally had a contrary opinion so double-checking. I thought when the CD was set up that I had the choice of reporting it on a current basis (at yr end) or at maturity (since < 1 yr maturity). The statement shows that the mo. end ending balance is the same as the original beginning balance (so all interest is accrued but does not change the balance). My understanding was that no interest would be reported until maturity (next yr) which is consistent with what I wanted then. I also understood that it was possible to change the tax reporting so that interest would declared for each partial yr at the end of each yr.


However,this AM the Ally rep told me that the interest would be reported at yr end and again at maturity. I should have asked for a supe then but didn't do it and now the wait has gone from 3 min to 25min.

[pb4uski]

Dunno as I don't have any CDs in a taxable account, but pretty sure the rep is right.... as earned.... you'll get a 2017 1099 for the interest earned in 2017 and a 2018 1099 for the interest earned in 2018.

I know my PenFed CDs credit interest monthly but no tax reporting on those since they are in an IRA.

[Sunset]

I new I had looked this up. Although since we just upgraded from the 1.5% to the 1.75% rate, it's rather moot as we had to cash in each , thereby getting the interest this year.

You have a choice:

"
When to report your interest income depends
on whether you use the cash method or an ac-
crual method to report income.
Cash method.
Most individual taxpayers use
the cash method. If you use this method, you
generally report your interest income in the year
in which you actually or constructively receive it.
However, there are special rules for reporting
the discount on certain debt instruments."

Note: the Ally CD's are not discount debt items.

https://www.irs.gov/pub/irs-pdf/p550.pdf

[PatrickA5]

I know with EE and Ibonds you could either account for the interest annually or wait until they matured (or cashed in). But, every CD I've owned always reported the current year interest on the 1099 at the end of the year.

[43210]

Quote:

Originally Posted by PatrickA5 I know with EE and Ibonds you could either account for the interest annually or wait until they matured (or cashed in). But, every CD I've owned always reported the current year interest on the 1099 at the end of the year.

I believe it's taxable when you get it, but with CDs longer than 1 year, they have to give you interest (at least) once a year. You can't get all the interest in one lump at the end of a multi-year CD.

With the Ally 11 mo. No-Penalty CD (like many others) you have some choice about timing of interest, but it's taxable when you get it.

So I'm pretty sure the accrued (but not yet paid) interest from 2017 is NOT taxable in 2017, but when you actually get it in 2018.

[43210]

OP, report back if you get a (possibly erroneous) 1099.

[Texas Proud]

Interesting question... I do not know as I do not buy CDs....


But, from what I remember with my mom, they accrued the interest monthly... this was to get compound interest... I cannot remember if the stmts showed the new balance or not, but I believe they did...

Are you getting simple interest? I would say if so then you only get that when it matures...

[Ready]

I had a 5 year CD from Ally and I received a 1099 every year for the interest accrued. I've never heard of deferring interesting on a bank CD until maturity.

[kaneohe]

Quote:

Originally Posted by Ready I had a 5 year CD from Ally and I received a 1099 every year for the interest accrued. I've never heard of deferring interesting on a bank CD until maturity.

I believe the exception only applies if term is < 1 yr. Then you may have to choice to take it at the end of the current yr and then the remainder when it matures. For the 11 mo. term, this could comprise 2 tax yrs. Still waiting to talk to Ally ........long wait times.

[43210]

Quote:

Originally Posted by kaneohe I believe the exception only applies if term is < 1 yr. Then you may have to choice to take it at the end of the current yr and then the remainder when it matures. For the 11 mo. term, this could comprise 2 tax yrs. Still waiting to talk to Ally ........long wait times.

I must be missing something. Surely tax reporting is done according to law, and there is no choice.

You have these choices:
"Change Interest Disbursement
The default Interest Paid selection is set to help you maximize your earnings. The annual percentage yield (APY) for the CD you're opening is based on all accrued interest remaining in the account until maturity. You can change the frequency and method by which your interest is paid, but taking interest out of your CD before the CD's maturity date will reduce your potential earnings. Interest on your CD is compounded daily regardless of how it is paid."

But regardless, tax is due for year interest is received. E.g. if you choose to get interest monthly, then an interest payment on say 6th Jan 2018, would be taxable entirely in year 2018, even if accrued (and compounded) daily from 7th Dec 2017.

If you want it somehow split between 2017 and 2018, probably your only choice is to break the CD at year end, then open a new one next year.

[kaneohe]

I might have misunderstood what the rep told me when I got the CD. I thought she said I could decide whether I got taxed on the 2017 interest in 2017 or 2018 by letting them know. I might have missed the part about having to take the interest out of the CD in order for that to happen. I guess I thought it was a true option like for EE bonds where you can choose to declare the interest annually or at maturity (but not have to remove interest from the bond).

Anyway perhaps the happy solution is to terminate the CD early before yr end.
That makes the accrued interest taxable this yr. Then reinvest in new CDs which have a higher rate and there is no-penalty for terminating the older no-penalty CDs.

[43210]

I just saw this
https://www.depositaccounts.com/blog...and-taxes.html
(seems reliable info) which references/quotes IRS Publication 550
"Certificates of deposit and other deferred interest accounts. If you open any of these accounts, interest may be paid at fixed intervals of 1 year or less during the term of the account. You generally must include this interest in your income when you actually receive it or are entitled to receive it without paying a substantial penalty. The same is true for accounts that mature in 1 year or less and pay interest in a single payment at maturity. If interest is deferred for more than 1 year, see Original Issue Discount (OID), later."

The underlined part may make these "no-penalty CDs" a special kind of case. (I have no idea, just thought I'd point it out.)

I'd be interested in how these are getting reported on 1099-INTs. (I need to carefully control investment income, so I have to avoid reporting uncertainty.)

I'd also be interested in hearing if any banks are incorrectly reporting on 1099-INTs, (i.e. putting interest in the wrong year) because that's another hassle to avoid.

[audreyh1]

Quote:

Originally Posted by kaneohe I thought I understood this but a rep at Ally had a contrary opinion so double-checking. I thought when the CD was set up that I had the choice of reporting it on a current basis (at yr end) or at maturity (since < 1 yr maturity). The statement shows that the mo. end ending balance is the same as the original beginning balance (so all interest is accrued but does not change the balance). My understanding was that no interest would be reported until maturity (next yr) which is consistent with what I wanted then. I also understood that it was possible to change the tax reporting so that interest would declared for each partial yr at the end of each yr. However, this AM the Ally rep told me that the interest would be reported at yr end and again at maturity. I should have asked for a supe then but didn't do it and now the wait has gone from 3 min to 25min.

My understanding from reading the docs was year-end and maturity unless you requested otherwise (more often).

Logging into your account will show interest that has been paid versus accrued.

The 1099-INT will let us know.

[43210]

It is too risky for me to open a CD without knowing for certain and in advance exactly how it will be reported. By the time a 1099-INT arrives it may be too late. (Cannot exceed investment income cap for EITC - One dollar over and I could lose $6k.)

[kaneohe]

Quote:

Originally Posted by audreyh1 My understanding from reading the docs was year-end and maturity unless you requested otherwise (more often). Logging into your account will show interest that has been paid versus accrued. The 1099-INT will let us know.

audrey....your post reminded me that I had just trashed the Disclosure that I just received after closing/reopening the new no penalty CDs. Here is what I found (pls let me know if you have something different....or perhaps your memory is worse than my deteriorating one...at least in this matter
sounds like at maturity for short CDs; yr end for long CDs but 43210 still has a valid concern about the no-penalty CD.

"5. How Interest Can Be Paid
a. CD Accounts: For CDs with terms of 12 months or less, we will credit the interest earned at maturity unless you have chosen another interest payment option.

For CDs with terms of more than 12 months, we will credit the interest annually at year end unless you have chosen another interest payment option that pays interest more frequently. "
https://www.ally.com/resources/pdf/b...-agreement.pdf

[audreyh1]

OK I guess I missed the part about the rule being different for the sub-year CDs.

I actually closed and reissued all my no penalty CDs on Dec 31 which caused interest to be paid on that date. So it’s a non issue for me.

[MBSC]

Quote:

Originally Posted by kaneohe "5. How Interest Can Be Paid a. CD Accounts: For CDs with terms of 12 months or less, we will credit the interest earned at maturity unless you have chosen another interest payment option. For CDs with terms of more than 12 months, we will credit the interest annually at year end unless you have chosen another interest payment option that pays interest more frequently. " https://www.ally.com/resources/pdf/b...-agreement.pdf

FWIW, my Ally Bank 1099 matches this. It reflects interest earned from a savings account, an 18 month CD that is still accruing interest, and an 11 month no penalty CD that I closed early during 2017.

It does not reflect interest from an 11 month no penalty CD and 12 month CD opened in 2017 that are still accruing interest.

[kaneohe]

Thanks.........appreciate the feedback! Thank goodness that the computer programmers know the rules better than the reps.