What Is Interest on a Bank Award?

Ever wondered why you sometimes get extra money on top of a court settlement or a resolution with your bank? That extra bit is called interest on an award. When a bank owes you money but doesn’t pay right away, maybe because of a dispute, a lawsuit, or a problem with your account, the law can require the bank to pay you interest for the time you had to wait. This interest is designed to make things fair, so you aren’t losing out while your money is tied up.

But here’s something many people don’t realize: just like the interest from your savings account, bank award interest can be taxable. It’s considered a form of earnings, so you need to know what to do when you receive it. In this guide, you’ll learn how the tax rules work, who needs to pay, and how to handle bank award interest when it’s time to file your taxes.

How Is Bank Award Interest Taxed?

Let’s break it down. The IRS looks at interest you get from a bank award the same way it looks at the interest from your regular bank accounts or even from a certificate of deposit (CD). If you receive a payment from a bank that includes interest, whether it’s from a lawsuit, arbitration, or a formal settlement, that interest is usually taxable.

Banks and other payers have to report interest payments over $10 to the IRS. They do this using a form called 1099-INT. If your bank award includes interest, you should get this form early in the year after you’re paid. But here’s a detail that trips people up: even if you don’t get a 1099-INT, you’re still required to report the interest as income.

Let’s look at an example. Suppose you settled a dispute with your bank and received $7,000. If $700 of that is labeled as interest on your settlement statement, you’ll need to report the $700 as interest income on your tax return. The rest of your settlement might not be taxable (unless it’s for something like lost wages or other specific items), but the interest part almost always is.

This rule applies no matter how you receive the money, by check, direct deposit, or even as a credit to your account. Any amount labeled as interest is treated the same way at tax time.

Why Does Bank Award Interest Count as Income?

You might be thinking, “Isn’t this interest just making up for the wait?” That’s a fair question. The IRS sees it differently, though. Any interest you collect, whether from a bank award, a bond, or a savings account, increases your wealth. That’s why it counts as income.

The tax rules are set up to be fair across the board. If you get interest because your bank made a mistake or took too long to return your money, that’s considered a financial benefit, so it’s taxed just like the interest you’d earn from a savings account. This applies whether your award comes from a court case, a settlement after a complaint, or an arbitration decision.

For example, if you sued your bank over an error and the court awarded you both the money you were owed and a separate amount labeled as interest, the interest is treated as taxable income. Even if it feels like compensation for your trouble, the IRS is clear: interest is income, and income gets taxed.

Reporting Bank Award Interest on Your Tax Return

When tax season rolls around, what do you actually need to do? Here are the practical steps:

  1. Watch for Form 1099-INT from the bank or whoever paid you. This form lists the amount of interest you received. It usually arrives in January or February and is sometimes easy to overlook among other tax documents.
  2. If your total interest income is more than $1,500 for the year (from all sources), you’ll need to fill out Schedule B (Form 1040) with your tax return. Otherwise, you can usually just enter the interest on the main Form 1040, in the section for interest income.
  3. Read your settlement paperwork carefully. Sometimes, the money you’re awarded is shown as one big number. Other times, the statement will break out the amount for the original claim (called the principal) and the amount for interest. Only the interest portion is taxed as interest income.
  4. If you aren’t sure how much of your award is interest, ask the bank or your lawyer for a detailed breakdown. Clear records now will save you trouble later.

Here’s a practical example. You get a $4,200 payout from your bank, but your paperwork says $4,000 is to repay what you were owed, and $200 is interest for the delay. Even if you don’t get a 1099-INT, you still need to report the $200 on your tax return. The $4,000 may not be taxable, depending on the reason for the award.

It helps to keep these records in your tax folder. If the IRS ever asks questions, you’ll be glad you can show exactly where your numbers came from.

What Happens If You Don’t Report Bank Award Interest?

It might be tempting to skip reporting a small amount of interest, especially if you didn’t get a 1099-INT. But the IRS gets a copy of all forms sent to you, and their systems match up what you report with what they have. If you leave the interest off your return, you could get a letter from the IRS asking about the missing income.

This can mean extra taxes, plus penalties and interest on the unpaid amount. If you realize later that you forgot to include bank award interest on a return, you’re allowed to file an amended return with the correct information. Doing this sooner rather than later usually reduces any extra charges.

For example, let’s say you forgot to report $250 in interest from a bank settlement last year. If the IRS catches it, they’ll recalculate your taxes and add a penalty. But if you catch the mistake and file an amended tax return, you’ll likely owe only the extra tax, not a steep penalty. It’s always better to fix it yourself than to wait for a notice.

How to Prepare for Bank Award Interest Tax

Nobody wants a tax surprise. The good news is, you can take a few smart steps to make sure bank award interest doesn’t catch you off guard.

  1. Keep all documents related to your award, including court orders, settlement agreements, and any 1099-INT forms. Store them in a safe place with your other tax paperwork.
  2. Check your award paperwork for a clear breakdown between the principal (the original money you were owed) and the interest. If it’s not clear, ask your bank or your attorney for clarification. This helps you report the correct amount and avoid overpaying taxes.
  3. If you’re expecting a large award, or if your finances are more complicated, consider speaking with a tax professional. They can help you estimate how much tax you’ll owe on the interest, and may suggest ways to reduce your tax bill, like adjusting your withholdings or making estimated tax payments.