If you have that much money in your savings account, you probably owe taxes

savings account tax

You are required to report and pay federal taxes on all interest income you receive from a savings account. The income is taxed as unearned, meaning you avoid payroll taxes, but you owe federal income tax on it at your regular rate. Banks and other financial institutions report your interest income on a Form 1099-INT if it is more than $10.

Consider talking to a financial advisor to understand how interest income on savings accounts might be taxed.

Taxes on savings accounts

The money you put into a regular savings account is already taxed and you don’t have to pay tax on it when you withdraw it to spend or invest. But interest on savings accounts is considered income by the tax authorities. This also applies if you do not withdraw the interest from the account.

Interest paid into almost any bank account, including savings accounts, checks, money market accounts, and certificates of deposit, is taxable. Dividends on deposits or shared accounts with credit unions, cooperative banks, savings and loans, and mutual savings banks also fall under taxable income.

Federal income tax due on savings account interest is calculated as a percentage of your taxable income according to current federal income tax brackets. These range from 10% to 37% depending on your income level.

Although you owe income tax on the interest on the savings account, the income is not regarded as income from work, such as wages and salary. As unearned income, it is not subject to payroll taxes, including Social Security and Medicare taxes. However, you may owe state income tax in addition to the federal levy.

While you usually have to pay taxes on interest you receive on your savings account, you don’t have to pay taxes on the balance of the money you keep in your account. You should have paid taxes on that money before you put the money in that account, so you won’t be taxed again just because you’re in the account.

How to file your earned interest taxes

savings account tax

savings account tax

The financial institution that holds your savings account is required to report all interest payments in excess of $10 for the year to the IRS using the 1099-INT form. The bank or other payer must send you a copy of the form no later than the end of January. You may receive it in the mail or it may be available as a document accessible through your online account. The amounts on this form are necessary to correctly file your tax return.

Sometimes you don’t receive a 1099-INT. However, this does not relieve you of the responsibility for declaring and paying tax on the interest. This is true even if the interest is less than $10. If it’s less than $10, the bank won’t send a form. In that case, you may need to go through your account statements and add up all the interest received to find out how much to declare on your tax return. If you don’t report interest income, you could pay penalties and interest.

If the bank didn’t send you a 1099-INT because you didn’t provide a social security number when you opened the account, you may be subject to a backup withholding. The bank will then withhold 24% of your interest to pay any tax owed. You may also be subject to backup withholding if you filed an accrued Social Security number or failed to file a return before.

Savings accounts that do not charge interest

Some banks offer a special type of savings account called an IRA savings account that allows you to deduct any deposits you make into the account from your current income. Interest income on these IRA savings accounts accrues tax-free as long as you don’t withdraw it.

However, once you withdraw money including interest from IRA savings, it becomes taxable as income. Also, if you withdraw from an IRA savings account before age 59 ½, you must pay an additional fee.

Some education savings accounts, such as Coverdell savings accounts and 529 plans, also earn tax-free interest. You pay no tax on the interest from these accounts as long as the money is used for education. You cannot use the money in these accounts for non-educational purposes, which can make it difficult for some if you want to withdraw money from your savings for more reasons.

Your final option for getting a tax-free savings account is to open a health savings account (HSA) or a flexible spending account (FSA). Both are used to pay healthcare costs, but have slightly different rules. The balance of a health savings account can be carried over from year to year, but you must have a high-deductible health plan to open one. An FSA, on the other hand, has a balance that must be used by the end of the year.

It boils down

savings account tax

savings account tax

Interest on savings accounts is taxed as income by the federal government. Interest income in excess of $10 is reported to the IRS and to you by the bank or other institution where the money is deposited using a 1099-INT form. However, you are required to report all interest received on your tax return, even if it is less than $10 and regardless of whether you receive a 1099-INT. Interest income is exempt from payroll tax, but you pay income tax on it at your normal rate.

Tips to save

  • A financial advisor can help you assess your tax situation. SmartAsset’s free tool free tool matches you with up to three financial advisors serving your area, and you can interview your advisor matches for free to decide which one is right for you. If you are ready to find an advisor who can help you achieve your financial goalsstart now.

  • You don’t have to use just one savings account. You can even use some accounts to help you with different things. For example, you might want to keep your emergency fund in a high-yield savings account, but you might also want to open an HSA while keeping your retirement savings in an IRA account. All this can get complicated pretty quickly, so you can use a savings calculator to help you figure out how much to put in each account.

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