Are You Taxed on Interest From a Savings Account?

Interest earned from a savings account is generally subject to taxation in the United States. This applies to various types of savings vehicles, including traditional savings accounts, high-yield savings accounts, money market accounts, and certificates of deposit (CDs).

Understanding Taxable Interest

Interest earned on savings accounts is considered ordinary income by the IRS and is subject to federal income tax. This means the interest is taxed at your regular income tax rate, which can range from 10% to 37%, depending on your total income and filing status. This taxation applies regardless of whether the interest is withdrawn or remains in the account and is reinvested. The tax obligation arises when the interest is earned, not when you decide to withdraw the funds. For example, if your savings account accrues $50 in interest during the year, that $50 is considered taxable income for that year, even if you do not touch the money.

Receiving Your Tax Statement

Financial institutions are generally required to issue Form 1099-INT, Interest Income, to account holders, reporting the total interest income earned during the calendar year. You receive a Form 1099-INT if the interest earned on your account is $10 or more. The form is sent by January 31st for the previous tax year’s earnings. If you earned less than $10 from a single institution, you may not receive a 1099-INT, but the interest is still taxable and must be reported. If you earned more than $10 and do not receive this form, you should contact your financial institution to obtain it or determine the exact amount of interest earned from your year-end statements.

Reporting Interest on Your Tax Return

Interest income from savings accounts is reported on your federal income tax return, Form 1040. If your total taxable interest from all sources exceeds $1,500, or if certain other conditions apply, you are required to complete and attach Schedule B, Interest and Ordinary Dividends, to your Form 1040. This threshold applies to the combined total of taxable interest and ordinary dividends. To report the interest, locate Box 1 on your Form 1099-INT, which shows the total taxable interest you received. If your total interest is $1,500 or less and you do not meet other Schedule B filing requirements, you can report this amount directly on the appropriate line of Form 1040; if Schedule B is required, you will list the name of each payer and the amount of interest received on Line 1 of Schedule B, then sum these amounts on Line 2, transferring the total to Line 2b of your Form 1040.

Important Considerations

Savings account interest may also be subject to state income taxes, as rules vary by state. Most states consider interest from savings accounts taxable, so it is advisable to check your specific state’s tax regulations. Interest earned in joint savings accounts is generally split equally between account holders for tax purposes. However, if the beneficial ownership of the funds is not equal, taxpayers may report their actual entitlement. Even small amounts of interest, those under the $10 threshold for which a 1099-INT is typically issued, are still considered taxable income by the IRS. You must report all interest income, regardless of whether you receive a tax form. Failing to report even minor amounts can lead to discrepancies with IRS records and potential penalties.