What Does Dividend Mean in a Bank Account?

A dividend typically represents a distribution of a portion of a company’s earnings to its shareholders. While this is the conventional understanding, the term “dividend” takes on a different, specific meaning when encountered in the context of bank accounts. It is important to distinguish this usage from the shareholder dividends paid by publicly traded companies, as the underlying financial mechanisms and implications are distinct.

Understanding Dividends in Bank Accounts

When the term “dividend” appears in relation to a bank account, it generally refers to the interest earned on the funds held within that account. Traditional banks typically use the word “interest” to describe the earnings provided to depositors for keeping their money in savings, checking, or money market accounts. Accounts such as savings accounts, money market accounts, and even certain checking accounts may accrue these earnings. The annual percentage yield (APY) indicates the total yearly earnings, including the effect of compounding, on these accounts, whether they are called interest or dividends.

Credit Unions and the Term Dividend

Credit unions predominantly use the term “dividend” instead of “interest” to describe earnings on their deposit accounts. This terminology reflects their unique cooperative structure. Unlike traditional banks, which are typically for-profit entities owned by shareholders, credit unions are not-for-profit financial cooperatives owned by their members.

The earnings credit unions generate, after covering operational costs, are returned to their members through various avenues, including higher savings rates, which they term “dividends.” This practice underscores the members’ ownership stake in the institution. It signifies that members are sharing in the credit union’s financial success, rather than simply earning interest from a for-profit corporation.

This distinction also extends to other financial products. For example, what a bank might call a Certificate of Deposit (CD), a credit union typically refers to as a “share certificate” or “certificate account,” with the earnings paid as dividends. However, it is noteworthy that credit unions do use the term “interest” when referring to loans they provide, such as mortgages or car loans.

Tax Treatment of Bank Account Dividends

Regardless of whether a financial institution calls the earnings “interest” or “dividends,” the Internal Revenue Service (IRS) generally treats these payments as taxable interest income. This means that any earnings received from bank accounts or credit union share accounts are subject to federal income tax.

Financial institutions are required to report these earnings to both the account holder and the IRS. If the amount earned is $10 or more in a calendar year, the institution will issue Form 1099-INT, “Interest Income.” This form details the total amount of interest or “dividend” income received.

Even if the total earnings are less than $10 and a Form 1099-INT is not issued, account holders are still obligated to report this income on their federal tax return. This ensures compliance with tax regulations regarding all taxable income. Taxable interest income is typically reported on Form 1040, and if the total taxable interest exceeds $1,500, or under certain other conditions, it must also be reported on Schedule B (Form 1040), “Interest and Ordinary Dividends.”