The tax liability should not change by changing the category of the income. It will either be reported on the Form 1040, line 8a for taxable interest or line 21 for other income. It is considered interest and reported according to IRS rule by the bank.
The amount of investment income must be $3,400 or less to qualify for the Earned Income Credit. This may be an issue on your tax return results if you are otherwise eligible for this credit.
The volume of legislative or administrative guidance has created an information-reporting conundrum for financial institutions and their customers. Banks use reward programs to promote certain business objectives, such as generating new accounts or incentivizing the use of a bank credit or debit card. Unbeknownst to some, rewards can trigger information return reporting requirements for the bank while constituting taxable income in the hands of the depositor. The facts and circumstances of the specific reward program generally dictate whether the financial institution has to send Form 1099-INT (1099-INT) or Form 1099-MISC (1099-MISC) to the IRS and reward recipients. Cash payments in respect to deposits are clearly interest income.
The IRS will be looking for this income on line 8a, so when the documents are matched with your return, they would inquire about whether the income was reported at all. It takes time for this matching to be completed.
