New York State Tax

Savings and Loan Association Dividends and Tax

In recent times, a large number of people are looking to keep their spending local by supporting local businesses. They feel that supporting their local economy will make a greater impact on the financial well-being of their area and the country. This movement has also spread to where people save their money. Many consumers are moving away from large, national banks and starting to utilize local credit unions or savings and loan associations. These types of financial institutions claim to offer better customer service and better rates. Consumers prefer to see their money support a local institution instead of possibly lining the pockets of already wealthy big bank executives.

Though there are many solid reasons for banking with a local trust, it is a common misconception that interest earned on these accounts is not taxable. These earnings, also referred to as savings and loan dividends, are taxable by the federal government at the same rate as interest or dividends earned on any other savings or investments. Therefore, potential federal tax savings should not be a key decision factor when choosing a banking institution.

However, it is also important to consider the state and local taxing authorities when making any type of financial decision like this. Some states do not collect any form of income tax and some states treat earned (i.e., wages from a job) income differently from unearned (e.g., interest or dividends). For example, Tennessee will tax dividends and interest received from any financial institution domiciled outside of the state, but will not tax dividends and interest received from certain institutions domiciled within the state. For some individuals or families, not paying state taxes on these dividends could result in a significant savings. For that reason, it is essential to know what specific state or local laws are in place.

This article has focused on the federal state and taxation laws for the typical taxpayer. However, there are specific considerations for certain groups of taxpayers, including the elderly and the blind. Federal tax laws allow these individuals to not file a tax return (and therefore avoid paying taxes) if their unearned income falls below a certain level. For many of these Americans, the IRS sponsors the Volunteer Income Tax Assistance program. This program allows taxpayers that meet certain age or income requirements to have their taxes prepared and filed by a qualified person and reviewed by a certified public accountant free of charge. The volunteers who participate in this program receive specific training to educate them of ways to identify potential tax savings, including those on certain types of unearned income. For people who cannot participate in this program, it is still highly recommended that they seek advice from qualified tax preparers if they are unsure about the rules applicable to their interest or dividend income.