Losing your money in a bank account can be a distressing experience, but did you know that there can also be income tax implications? Here’s what you need to know:
- FDIC Insurance: The Federal Deposit Insurance Corporation (FDIC) insures deposits in most banks up to a certain amount. If you have deposited a sum of money within the FDIC-insured limit and the bank fails, you will receive the insured funds. FDIC insurance limits have grown over the years and are currently set at $250,000 per depositor, per bank. If your losses exceed the FDIC-insured limit, you may be able to claim a tax deduction for the loss.
- Tax Deduction: If you lose money in a bank account that is not covered by FDIC insurance, you may be able to claim a tax deduction for the loss on your income tax return. However, you can only deduct losses that exceed $100 and are not reimbursed by insurance. You will need to itemize your deductions to claim this deduction.
- Taxation of Interest: If you earned interest on your bank account before it was lost or stolen, you must report the interest income on your income tax return. The interest income is taxable whether you receive the interest income or not. And you cannot deduct from your income taxes the bank’s loss as a result of insolvency since it would be considered a personal loss rather than a business loss.
- Recovered Funds: If you recover some or all of your lost funds in a later tax year, you may need to amend your tax return for the year in which you took the deduction. Any recovered funds must be reported as income in the year of recovery.
Overall, losing money in a bank account can have several income tax implications depending on the circumstances. It’s important to keep accurate records and consult with Matthew Jennings, JD, MBA, EA, RFC®, CEP®, CES™, aka Tax King Matt, a tax professional if you have any questions or concerns about how these implications may affect your specific situation.