What is Backup Withholding?
Last week I contacted Ally Bank with a last minute change of heart. I had intended to roll our 12 month CD into a 5 year CD upon expiration, but had second thoughts when I saw that Series I Savings Bonds are more attractive than CD rates.
I actually contacted Ally on the renewal date and was thus able to get the money back out without any penalties. I did, however, notice that our “available balance” was lower than our actual balance.
When I asked about the discrepancy, I was told that we hadn’t sent in our signature cards, and were thus subject to backup withholding. Backup withholding? I wasn’t even sure exactly what that is.
I’ve seen the term many times over the years, but have always checked the box saying that I’m not subject to it. I’ve always known that backup withholding is a special form of income tax withholding, but I never really knew when it applied.
What is backup withholding?
Investment income is not typically subject to regular income tax withholding, but it may be subject to backup withholding to ensure that the IRS gets their money. In general terms, most payments that are reported on Form 1099 are potentially subject to backup withholding.
The backup withholding rate is currently 28%, which means that Ally withheld 28% of our interest earned. This amount will be sent to the IRS on our behalf, and will be reported on our 1099-INT at the end of the year.
Since it’s relatively late in the year, and the amount in question isn’t huge, this isn’t a big deal. Sure, we’ll lose the ability to immediately reinvest our interest, but it will be applied to our tax bill when it comes time to file 2009 taxes.
Who is subject to backup withholding?
According to the IRS (but boiled down into plain English) backup withholding applies if any of the following apply:
- You have not given the payer your Tax ID number,
- You have not certified to the payer that this number is correct,
- The IRS has notified the payer than the number is incorrect,
- The IRS has notified the payer to begin withholding because you have not reported all such income in the past, or
- You have not certified that you are not subject to backup withholding
I’m guessing that it’s this last point that tripped us up. I have no idea what the Ally Bank signature cards look like, but I’d be willing to bet that they have a checkbox to certify that you’re not subject to backup withholding.
Disclaimer: Discover is a paid advertiser of this site.
Reasonable efforts are made to maintain accurate information. See the Discover online credit card application for full terms and conditions on offers and rewards.
Filed under: Banking, Taxes
About the author: Nickel is the founder and editor-in-chief of this site. He's a thirty-something family man who has been writing about personal finance since 2005, and guess what? He's on Twitter!
Related articles...
» Federal Income Tax Rates Went Down but Your Federal Tax Withholding Increased. Here’s Why…» Estimated Taxes and Avoiding Underpayment Penalties
» Making Work Pay Credit: Tax Credit Results in Reduced Federal Income Tax Withholding
» What Happens if Lending Club Goes Out of Business?
» Securing Financial Documents on Your Computer
» Reshuffle Your Retirement, Part Deux
» Ten Things to Do With Your Tax Refund
» Don’t Get Hacked
Was this article useful? Please sign up to receive our content via e-mail:
5 Responses to “What is Backup Withholding?”
Leave a Reply
Top Cards by Category
The new Discover it card is out to change the way people think about credit cards. No annual fee. No overlimit fee. No foreign transaction fee & no pay-by-phone fee. No late fee on your first late payment. And Discover won't increase your APR for paying late.*
Bonus Miles: Earn 30,000 bonus miles toward Award Travel after you spend $500 on the Card within the first three months of Cardmembership. Earn As You Spend: Get 2X miles on Delta purchases and 1X miles for all other eligible dollars spent.
The new Discover it card is out to change the way people think about credit cards. No annual fee. No overlimit fee. No foreign transaction fee & no pay-by-phone fee. No late fee on your first late payment. And Discover won't increase your APR for paying late.*
The new Discover it card is out to change the way people think about credit cards. No annual fee. No overlimit fee. No foreign transaction fee & no pay-by-phone fee. No late fee on your first late payment. And Discover won't increase your APR for paying late.*
The new Discover it card is out to change the way people think about credit cards. No annual fee. No overlimit fee. No foreign transaction fee & no pay-by-phone fee. No late fee on your first late payment. And Discover won't increase your APR for paying late.*
The new Discover it card is out to change the way people think about credit cards. No annual fee. No overlimit fee. No foreign transaction fee & no pay-by-phone fee. No late fee on your first late payment. And Discover won't increase your APR for paying late.*
The SimplyCash(R) Business Card from American Express aims to help your business succeed with a generous cash-back rewards program. Many businesses can benefit from cash back categories such as U.S. office supply stores, wireless telephone services purchased directly from U.S. service providers and U.S. gas stations. This card not only offers a low introductory purchase APR but also doesn't charge an annual fee.
The new Discover it card is out to change the way people think about credit cards. No annual fee. No overlimit fee. No foreign transaction fee & no pay-by-phone fee. No late fee on your first late payment. And Discover won't increase your APR for paying late.*
- How to Become a Millionaire
- How to Get Out of Debt
- The Best Dollars I've Ever Spent
- How Our Estate Plan is Structured
- How We Paid Our Mortgage In Less than 10 Years
- Money Making Ideas
- How to Manage Your Asset Allocation with Multiple Accounts
- Consumption Smoothing - Save While the Saving's Good
- How to Save on Groceries
- How Much Life Insurance Do You Need?
- Eleven Great Books About Money
- Dave Ramsey is Bad at Math
- Dish Network Customer Service SUCKS
- $8,000 Homebuyer Tax Credit
- Pay Off Mortgage Early or Invest?
- How to Claim the First-Time Homebuyer Tax Credit
- Termite Control: Sentricon vs. Termidor
- How Much Should You Pay a Babysitter?
- Reduced Credit Limits? Share Your Experience
- Ethanol Blended Gas = Lower Mileage?
- $15,000 Homebuyer Tax Credit
- Buying Furniture off the Back of a Truck
- Will Mac OS X Lion Kill Quicken 2007?
How to save money on insurance
- How to help your family after you are gone
- Will Social Security be gone before I retire?
- Refund, or no refund?
- This battle of the sexes has no winner
- What to look for when buying an energy-efficient home
- The hidden savings in a rent payment
- How to save money on vacations using social media and new technologies
- How to budget without regular paychecks
- What do you do with your windfalls?
- Don't believe the bull
November 11th, 2009 at 3:44 pm
One thing in your favor is that the withholding is a credit to your income tax, so while it may be an irritation to have it withheld, you won’t be out any additional money as a result.
The worst of it is that you’ll loose control of the money until filing time, but as you said it’s a small amount.
November 11th, 2009 at 5:40 pm
I’m surprised you didn’t get a signature card. When they sent them for our CD, they messed up my name, and it took a bit to get things straightened out. We got several reminders to send the cards back in…
November 11th, 2009 at 6:43 pm
VT: I actually recall having received forms from them on more than one occasion because we neglected to return the first batch. I’m quite sure that I returned the second batch, but they have no record of it. This actually dates back to when they were still GMAC, so it’s possible that something got messed up in the transition, or perhaps I’m just mis-remembering and we never sent them in.
November 12th, 2009 at 10:51 pm
It’s a good idea to scan or photocopy those documents. Then at least you have a record. The things banks “lose”: amazing!
November 13th, 2009 at 12:35 pm
I’ve never had the bank loose anything, but this is good to know. I guess I should prevent things from happening before its too late!