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Does one get charged on how much they have in the bank
October 5, 2012 12:02 AM   Subscribe

Does one get charged on how much they have in the bank? For example, let's say that I make $800 a month, which I assume is too little to file for taxes (is it?), but I have like $50,000 in my bank (not earning enough interest to consider for taxes). Will the government charge me a lot more and make me pay taxes? I was talking with a friend (who's not an expert with finances btw) and he claimed that his dad used to make a negative $30,000 income a year, yet he still got taxed because he had tons of money stored in his bank. And then my friend claimed that the only way not to get taxed is to keep the money outside the bank away from where the IRS can see it. I am confused. I thought you get taxed based on what you earn, not how much you have just sitting around in a bank. My theory was that one can have million dollars in the bank but if they don't earn anything that year, not even in interest, then they don't pay or file taxes. Can anyone clear up for me?
posted by kopi to Work & Money (30 answers total) 6 users marked this as a favorite
 
Try the IRS: Do you need to file a federal income tax return?
I was talking with a friend (who's not an expert with finances btw) and he claimed that his dad used to make a negative $30,000 income a year, yet he still got taxed because he had tons of money stored in his bank.
Your friend's dad may have been making net negative 30,000 a year, but claiming bogus deductions or otherwise subject to AMT. Or you could be missing out on some important details.
And then my friend claimed that the only way not to get taxed is to keep the money outside the bank away from where the IRS can see it.
Sounds like tax fraud. Not something the IRS looks kindly on, when they finally discover you.
I thought you get taxed based on what you earn, not how much you have just sitting around in a bank.
That's roughly accurate. Once you have paid tax on your income, it is yours. If you invest that money and make a profit, then you are receiving capital gains. Capital gains are taxed a little differently from ordinary income (a lower tax rate), but you are only taxed on the new money you've earned.

If you want to educate yourself, read the IRS website. They provide a lot of useful information in fairly plain English.

Try not to pay much attention to the weird stories people tell about how they handle their taxes. At the end of the day, it is just a slightly obtuse way to brag about their income.
posted by b1tr0t at 12:13 AM on October 5, 2012 [8 favorites]


You don't pay taxes on the money you have saved in the bank - you pay taxes on the income you get (interest, dividends if that money is invested in stocks, etc) based on your money.

So yes, even if you don't work - but the amount you make in interest etc. is above the minimum limit at which someone starts paying taxes, you'll have to pay taxes as your bank will report interest income to IRS using form 1099-INt.
posted by bbyboi at 12:15 AM on October 5, 2012 [3 favorites]


Some countries (e.g. France) have a wealth tax as well as an income tax, primarily under the argument that people should be incentivised to be active in the economy rather than "sitting on" accumulated wealth (this is a complex argument in the details).

But, most countries tax primarily on income, including a tax on the interest gained on money in the bank. So if you have, say, 100,000 pounds in the bank earning, say, 2% interest, then you pay tax on the 2,000 pounds of interest that you earn during the year. In some countries this is just part of the usual income tax system, in others it is treated differently. So, in the example, if the tax rate is 20% then you would pay 400 pounds of tax on the interest earned during the year (in reality the calculation would be on monthly income so the calculation is a bit naive, but you get the idea).
posted by Jabberwocky at 12:48 AM on October 5, 2012


Yeah I don't want to risk any trouble with the IRS. I don't think my friend even knew what I was talking about in the first place. After all he's not very bright, even though he's my friend. He didn't clarify whether it was gross income or net, he just went "my dad earned negative!". How in the world is it possible to earn negative gross income and then have the IRS come and take money "because my dad was rich"? I was so confused.

For example, someone might have minimum wage and work his way up to a million over his lifetime. He earned that million through long hard work. Why would the IRS take it if he already paid his income tax every year and the IRS already got their share?
"only taxed on the new money you've earned." Yeah I thought so.

Is there a different income criteria for interest? When I was trying to do my taxes (turns out I make way too little to file taxes), I added both wages and bank interests (like a couple of cents every month) together. Did I do it wrong? Do bank interests have to be calculated separately? Sorry, I am really new to this and the IRS pages are a puzzle to figure out. I tried using the 1040ez

I hope the US doesn't have 'wealth tax'.
posted by kopi at 12:54 AM on October 5, 2012


If you have a bank account, the bank will send a letter at the start of the new year, usually in January with the taxes they deducted from your interest income.
posted by infini at 1:08 AM on October 5, 2012


Really? I had my bank account once I hit 18, so about a year and a half now. Maybe it's because I was dependant, but I never got a statement about my interest. Do you mean the bank automatically takes from my interest without me having to fill out any paperwork for the IRS?
posted by kopi at 1:10 AM on October 5, 2012


I'm not a tax preparer. This isn't legal tax advice.

Your bank sends you a form (or makes one available for download) that tells you the amount of interest you earned. This is the 1099-INT. You don't need to calculate anything; they'll tell you what you got!

On a 1040EZ you put the sum of all your interest from all your bank accounts on line 2 ("Taxable interest"). Then it tells you to add lines 1 (taxable wages, salaries, tips), 2, and 3 (unemployment, Alaska oil funds) together for your adjusted gross income. The adjusted gross income is what determines your tax liability, and what you use to lookup in the tax tables. So yes, on the 1040EZ you end up adding your taxable wages and interest together.
posted by sbutler at 1:10 AM on October 5, 2012 [2 favorites]


And then my friend claimed that the only way not to get taxed is to keep the money outside the bank away from where the IRS can see it.

There's a great number of people who believe the government is constantly looking over their shoulder and checks their bank balance at least as often as the account owner. There are many many people who stash their cash in mattresses, envelopes in hidden desk drawers, or even their walls. It's not actually something that's ... based in reality.

For a variety of reasons, taxing assets is regressive, which is why few systems actually do it. The US primarily taxes income, which is money you earn in the calendar year you earn it, either by working or by receiving investment income. Taxes on things such as capital gains (i.e. how much a stock appreciated) are only accounted for at the time of sale, so you could buy Microsoft in 1980 (or whenever it went public) and hold it until now without paying a dime (although dividends would be taxable income). Doing it this way is more progressive, which is here a way to say that the more you earn the higher your percentage of tax paid will be.

I added both wages and bank interests

That's correct. Bank interest, if you file a full 1040 or 1040A, is reported on Schedule B, but from there it flows to the front page of your 1040 and is taxed the same as wage income. The 1040EZ is just a simplified version of the 1040 and does not change how your money is taxed.

he claimed that his dad used to make a negative $30,000 income a year, yet he still got taxed because he had tons of money stored in his bank

It's really hard to know what "negative income" means from this. Does he mean he had $300,000 at the beginning of the year and either spent $30,000 of that, or the asset values declined by 10%? Either way, that is not income, at least not in US parlance. If you have tons of money in a bank, though, and you're in a high-interest time period (unlike today), you can still have a significant Schedule B interest income.

My theory was that one can have million dollars in the bank but if they don't earn anything that year, not even in interest, then they don't pay or file taxes.

Technically, yes, since $1M would earn you about $10,000 in interest give or take some (1% yield on current CDs). That would then be taxed depending on your personal exemptions and standard/itemized deductions. By itself it's not a lot of income. There are many elderly people who have this situation -- their only income is from interest and retirement (social security and/or pension), thus often living tax-free. It's unusual for a younger person, of course, but there are people who have family trusts and so forth.
posted by dhartung at 1:12 AM on October 5, 2012 [3 favorites]


The tax forms have different lines for things like wages and interest income: don't add them together ahead of time. It's actually very easy to fill out basic tax forms at your level: your W2 (your statement of wages from your employer) will have various dollar amounts broken down into a variety of numbered and labeled boxes, and the 1040 or 1040EZ will say things like 'put the $$$ from box 17 on your W2 on this line'.

You will receive a separate W2 from each of the employers you worked for through the year; add all the 'line 17s' for example together (but do NOT add anything else!) as one figure for the tax form, add all the 'line 12s' together at a separate figure, and so on.

Your bank will send you a statement at the end of the year with your savings account's interest income, and there will be a line on the 1040 or 1040EZ for that dollar amount, too.

You MUST have your W2s and the bank's interest statements BEFORE you file; you can't just use the amounts off of the statements you get with your paycheck, so what year's taxes are you working on? Unless you filed for and received an extension, the 2011 tax return was deadline was April 2012, and the 2012 taxes cannot be filed until at minimum January 2013 (after you receive your W2 from your employer). Oh, and finally: yeah, your friend has no clue what he's talking about, do NOT take financial or tax advice from him!
posted by easily confused at 1:27 AM on October 5, 2012 [1 favorite]


Your change in net worth from year to year could be negative and you could still have positive taxable income, especially if much of that money was in investments. The other thing is that if you haven't paid taxes you should have paid ages ago, then having money in the bank is a place that the IRS could conceivably find it and garnish it, even though you don't currently owe anything for taxes. My guess is that one of these two things happened and your friend, not knowing all the facts, drew some incorrect conclusions about how the sytem works.
posted by gracedissolved at 1:57 AM on October 5, 2012 [2 favorites]


The OP's friend is of course talking about the halcyon days when having money in a savings account or invested safely could be expected to generate 7% in annual interest (or dividends, or capital gains). One hundred thousand dollars at that rate would generate about $7,000 per year in income. And of course the government wants a share of it.
posted by yclipse at 3:49 AM on October 5, 2012 [1 favorite]


Many banks will not mail out a 1099-INT if the interest you earned in the past year was less than $10.

Taxes typically are not deducted from interest income by U.S. banks for U.S. citizens. This is something that happens for non-U.S. citizens who have U.S. bank accounts, who meet certain criteria.

OP, in the future, when you ask tax or other finance-related questions, it would be helpful if you specified where you are and your country of citizenship. Answers can change considerably based on this information - for example, if you are currently residing in the U.S. French taxation laws may not be that applicable to you.
posted by needled at 4:34 AM on October 5, 2012 [2 favorites]


The other possibility with your specific bank account is that you aren't earning interest on it. A lot of savings accounts require a minimum balance to earn interest on what's in there, and a lot of checking account will not give interest at all.
posted by DoubleLune at 4:44 AM on October 5, 2012


I actually know someone with Very Significant Assets - not "never work again" assets, but definitely more money than most of us. They own no property and have no children. That person, who gets confused by their tax schedule and once asked me to figure it out, pays these taxes:

1. Regular payroll-type taxes
2. Taxes on interest earned, which come from a statement sent by the bank
3. Taxes on dividends, which comes from statements sent by the brokerage
4. Capital gains taxes if any stocks were sold at a profit.

There's also some complicated fiddly stuff about stock splits and so on that luckily I did not need to understand.

Frankly, rich people with assets have a pretty sweet deal, in my tax-preparing experience. Whenever you hear a rich person griping about the IRS and the huge, burdensome tax rates they have to pay, be very skeptical - cause I have seen and it really isn't that bad.
posted by Frowner at 6:03 AM on October 5, 2012


I am not a tax lawyer nor a tax accountant nor a law taxer nor a taxcountyer, but people are throwing around the word 'earned' fairly loosely in this thread. The IRS makes a distinction in its documentation between earnings, which you get from working, and other kinds of income. Interest on savings is income, but it's not earned.

Just pointing this out; it's easy to get yourself in trouble reading PDFs from irs.gov unless you parse the language very carefully.
posted by Rat Spatula at 6:21 AM on October 5, 2012 [1 favorite]


This anecdote could be the end of a story that went something like this:

1- The guy's dad earns no money in a year from his regular gig. In fact, he spends $30,000 that year keeping the bills paid.
2- He tells the IRS the same. Taking deductions and refundable tax credits all over the place.
3- The IRS pays him a "refund" because of the refundable tax credits.
4- He also carries forward some of those losses to the next year(s) to offset income from those years.
5- The IRS flags him for an audit.
6- The look at his cash assets for that year and instead of dropping by $30,000 like he said, he gained $50,000. Probably from doing some kind of under the table work.
7- Because the dad couldn't adequately explain how his reported $30,000 loss turned into a $50,000 gain, the IRS deemed that he did in fact have income for the year and owed taxes on it.

So, no, you don't generally owe taxes for money that you have. You do owe taxes for money you gain, even if it's not reported to the IRS. If you gain significant money and don't report it to the IRS, you'll probably get audited and have to explain where it came from.
posted by gjc at 6:37 AM on October 5, 2012 [1 favorite]


A lot of savings accounts require a minimum balance to earn interest on what's in there

And even those that do earn interest without a minimum balance do so at tiny rates. I have a not insignificant amount in my savings account, and I doubt I'll earn $10 in interest on it this year.

I'll also add my voice to the chorus of folks suggesting you not worry about other people's big talk about tax craziness. There's a lot you don't know about why your friend's dad owed X rather than Y, and it has nothing to do with you.

Assuming you're 19 or 20 years old, and assuming you're not from an extremely wealthy family, you're probably fine in terms of chunks of money just sitting in the bank. Even with interest on a savings account, $50K is not going to earn enough interest to be a real concern. If I had that amount in my savings account, I'd make about $0.50 a month on it.

A smarter thing to do with your money, if you have thousands just sitting in an account somewhere -- assuming you're not planning on living on that money in the next few years -- would be to put as much as you can into a Roth IRA. It'll appreciate at a much higher rate than your savings account would, and it's tax-free as long as you follow certain rules.
posted by Sara C. at 7:35 AM on October 5, 2012


(Correction: a Roth IRA is post-tax, not actually tax free. Which means you pay with income you've already been taxed on, so you don't pay taxes when you withdraw decades down the line.)
posted by Sara C. at 7:42 AM on October 5, 2012


If you have a bank account, the bank will send a letter at the start of the new year, usually in January with the taxes they deducted from your interest income.

No, they send a letter telling the IRS how much you made in interest. The bank doesn't take anything out; you have to make up whatever you owe the government for tax on interest when you file in April.

For example, let's say that I make $800 a month, which I assume is too little to file for taxes (is it?)

If you're getting a paycheck, you're probably already paying taxes from your income that you'd probably want to get back by filing taxes in April. Your tax obligation might be zero based on how much you make, but if your employer is withholding income from your salary you should file to get that money back.
posted by LionIndex at 7:49 AM on October 5, 2012 [2 favorites]


There is no way for someone who makes minimum wage to save up a million dollars, by the way.

File your taxes, it's really easy, and you might get some money back. You're definitely earning enough to be required to file.
posted by the young rope-rider at 8:48 AM on October 5, 2012 [1 favorite]


Whenever you hear a rich person griping about the IRS and the huge, burdensome tax rates they have to pay, be very skeptical

Especially given their tax rates now are a fraction of what they've been in the past.
posted by Rash at 8:51 AM on October 5, 2012 [1 favorite]


I'm wondering why you hope the US doesn't have 'wealth tax'. Based on this question about income taxes, I'm guessing that (like most people in this country) you don't have a strong background in economics and policy development.

I'm not here to advocate one way or the other, but a case could certainly be made that a wealth tax is exactly what is needed in an economy where 1% of the population "controls nearly a third of the nation’s financial assets (investment holdings) and about 28 percent of nonfinancial assets (the value of property, cars, jewelry, etc.)".

This is not intended as an opening for a discussion on tax policy. It is simply a comment to the OP who, as a citizen and voter, has a stake in the game.
posted by she's not there at 11:08 AM on October 5, 2012


I had my bank account once I hit 18, so about a year and a half now. Maybe it's because I was dependant, but I never got a statement about my interest. Do you mean the bank automatically takes from my interest without me having to fill out any paperwork for the IRS?

The statement is only sent, I believe, if you make more than $10 in interest over the course of the tax year. The bank does not take any taxes out of your interest income for a regular savings account, as far as I know.

(Not a lawyer, not tax advice, etc)
posted by getawaysticks at 11:48 AM on October 5, 2012


she's not here, you have a good point. I forgot that most wealth is held by a small percentage. I was talking from the notion that I wouldn't want anyone to tax my wealth if I made a ton through hard work.

Man, life is confusing. A lot to learn. :)
posted by kopi at 12:06 PM on October 5, 2012


Yes, if you make "a ton" through hard work, you will be taxed on it. That's called income tax.

Nobody's going to raid your bank account if you have a lot of money just sitting in checking or a low-yield savings account. But wealthier people don't just let their money sit in a low-yield account somewhere. They invest. And their investments yield more income, which is taxed just like you task the income that comes from a paycheck.

If you're making minimum wage in a service industry job and don't own a home or have your own business or anything, though, you don't have to worry about any of that. Just do your income taxes on your 1040EZ and enjoy the refund you are probably entitled to.

Filling out a 1040EZ is dead simple. It's really just copying numbers from one piece of paper to another, doing a little bit of basic arithmetic (subtract box A from box B), and knowing your bank account info so they can direct deposit the refund*. You can do it all online. It's very easy. Literally the hardest part is remembering to watch your mailbox for the W2, which gets complicated if you have multiple addresses (as lots of college students do) or multiple jobs in the course of a year (ditto).

*Unless, of course, you owe taxes and have to pay. Boo.
posted by Sara C. at 12:51 PM on October 5, 2012 [1 favorite]


It's possible that what happened is your friend's dad runs a business (either as a sole proprietorship or separate entity), the business took a loss of 30k, but his dad realized enough income from investments (probably not a savings account, your friend is likely using "in the bank" to mean "invested money" rather than literally "money in a deposit account") that he still had a substantial taxable income. It's probable that your friend misunderstood what his dad told him and thus came up with the "to avoid these taxes, stuff the money under your mattress instead!" all on his own. Or it's possible that his dad had some kind of offshore accounts and didn't file the right paperwork and got fined for it; those fines are generally based on the balance of the offshore account.
posted by phoenixy at 1:33 PM on October 5, 2012 [1 favorite]


Sara C, I don't think you understood what I said. Let's say a person saves $5,000 a year, after paying off his dues, costs, and taxes. Within three years, he has $15,000 in his bank without any interest. I don't think the IRS is going to come, look at the $15,000, and then try to take some of that as long as it's just sitting there without generating any extra income. They'd be thieves if they did and no one would be able to save.

I think what happen with my friend's dad was, for example, the dad might've made like $50,000 in a year, but lost $80,000. The net income is a negative $30,000. But, he still made $50,000 gross income, so he got taxed on the $50,000. I never got to ask my friend if that is what he meant because he was interrupting me the whole time. I do know that his dad invested a lot. I have a feeling that my friend pulled "he was still taxed simply because he has a lot of money" out of his ass.
posted by kopi at 1:38 PM on October 5, 2012


And their investments yield more income, which is taxed just like you task the income that comes from a paycheck.

For long-term investments (those held over 18 months) it isn't "just like" income tax at all. Check the table at Wikipedia's Capital Gains page -- those tax rates are much lower than the income tax rate.
posted by Rash at 2:47 PM on October 5, 2012


At $800 a month, you'd definitely be paying some payroll tax and possibly a little income tax, depending on your exact circumstances, by the way. The $50,000 in the bank is irrelevant unless it actually earns interest.

Also, your friend's dad needs a good CPA and/or tax advisor. Structured properly, he should have paid no income tax in years where his investment losses exceeded his income, at least at the levels of income we're talking about here. When income is larger, limitations on the amount of losses you can book for tax purposes in any given year come into play, but they can carry forward losses they can't deduct into future years, so it evens out in the end unless the losses are large enough that the limit on the number of years losses can be carried forward comes into play. In that case, there are other ways to structure one's affairs that solve that problem, too.

All that said, some people don't think very much about it and so pay far more than they have to. TurboTax or TaxAct or whatever are great for those of us with relatively simple situations. If you've got real money and lots of investments, though, you're making a huge mistake by not retaining a professional.
posted by wierdo at 5:09 PM on October 5, 2012


I actually don't make $800 a month, that was a theoretical example. Should've made it clear. I made only like $1500 in a year so far, and I think I am still considered dependent.

My friend's dad is dead but if I ever get into issues with taxes, I'll take your advice. I believe I got my question answered too.
posted by kopi at 2:30 AM on October 7, 2012


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