Federal Tax Withholding on Savings Account?

[Austin704]

I recently opened a high-yield savings account at Citibank. First interest payment was credited as expected but accompanied by a 24% federal backup tax withholding. I don’t recall a savings account or interest-paying brokerage account ever withholding federal income taxes, they just report the income to the IRS and then I’m responsible for paying the tax when I file.

When I contacted Citi about this, they told me I have to fill out a W-9 and send it in to avoid withholding. The W-9 just confirms that my SSN is my TIN and Citi already has my SSN! Seems unnecessary to me.

Anyone else have this experience?

 

[pb4uski]

No... never had withholding on interest. Fill out the W-9... agree it seems unnecessary as I would have thought that they have your SSN from when you set up the account.

 

[SecondCor521]

The key thing about a W-9 is that you sign, under penalty of perjury IIRC, that you are not subject to backup withholding. Most normal people aren't, but apparently this bank is being particular about ensuring that you are not.

If someone is subject to backup withholding, I think that means that they fell behind on their withholding at some point and then owed the federal government income taxes that they couldn't pay. I think it's just a way for the government to make sure everyone is playing nice nice with sending in what they owe when they owe it, and penalizing those who wandered outside the lanes of proper behavior.

Presumably the 24% withholding is to cover the bank in case you are subject to backup withholding.

It's annoying, but you can certainly include the withheld amount with any other withholding on your tax return for this year, and it will go towards your tax liability or your refund, as the case may be.

 

[The Cosmic Avenger]

Before bothering with the form, I would call back and ask again, pretending I hadn't already gotten the answer I didn't like. There's a chance that the CSR was misinformed, and if not, it only takes a minute or two of your time. You can always read the forums while on hold!

 

[Austin704]

Before bothering with the form, I would call back and ask again, pretending I hadn't already gotten the answer I didn't like. There's a chance that the CSR was misinformed, and if not, it only takes a minute or two of your time. You can always read the forums while on hold!

That’s a good idea. Time for a second opinion.

 

[cathy63]

I'm surprised they didn't make you certify that you're not subject to backup withholding when you setup the account. I think I've had to do that with every taxable account I've ever opened. Usually it's just a checkbox and signature though. I don't recall filling out an actual W-9 form.

If they're already taking withholding, even multiple phone calls are unlikely to get it changed. You'll spend less time just filling out the W-9 and sending it in.

 

[Perryinva]

I have a high yield account with DERI (2.7% for over $50k) and they do the same thing. Since I have to pay every year, no big deal, especially this year. But I haven’t figured if there is any substantial loss of compounded interest, for next year, in which case, a W-9 would be worth it.

 

[Sunset]

I have a high yield account with DERI (2.7% for over $50k) and they do the same thing. Since I have to pay every year, no big deal, especially this year. But I haven’t figured if there is any substantial loss of compounded interest, for next year, in which case, a W-9 would be worth it.

Not worth it, as not much interest is missed.

My rough calculations:
$50000×.027 (interest earned per yr)×.0024 (get tax withheld) ×.5 (avg time of the tax holdings = $1.62 per year.

 

[ziggy29]

Not worth it, as not much interest is missed.

My rough calculations:
$50000×.027 (interest earned per yr)×.0024 (get tax withheld) ×.5 (avg time of the tax holdings = $1.62 per year.

.0024 is 0.24%. The withholding is 24%. Shouldn't the calculation multiply by 0.24 instead of 0.0024? Or did I miss something?

 

[pb4uski]

You missed something big time... I came up with between $3.31 difference.

	No Witholding	With W/H	Withholding
0	50,000.00	50,000.00
1	50,337.50	50,256.50	81.00
2	50,677.28	50,514.32	81.42
3	51,019.35	50,773.45	81.83
4	51,363.73	51,033.92	82.25
	51,363.73	51,033.92	326.50
			3.31

 

[Perryinva]

So basically $9/yr per $50k, (close enough) so $200k is $36. Meh.

 

[pb4uski]

No, $3.31 per year for $50k.

 

[Austin704]

I'm surprised they didn't make you certify that you're not subject to backup withholding when you setup the account. I think I've had to do that with every taxable account I've ever opened. Usually it's just a checkbox and signature though. I don't recall filling out an actual W-9 form.

If they're already taking withholding, even multiple phone calls are unlikely to get it changed. You'll spend less time just filling out the W-9 and sending it in.

Thanks. I believe you’re right. My second call to customer service yielded the same answer, so I’ll just send in the form...