Do I Get Taxed on My Savings Account?

A savings account is a financial product offered by banks and credit unions designed to help individuals store their money securely while earning a modest return. These accounts allow for the deposit of funds not immediately needed for daily expenses, providing a safe place for short-term savings goals or emergency funds. While offering easy access to deposited money, savings accounts typically differ from checking accounts by having some limitations on withdrawals and often providing a higher interest rate. The primary purpose of a savings account is to facilitate the accumulation of funds over time through regular deposits and the compounding of interest.

Understanding Savings Account Interest Taxation

When you deposit money into a savings account, the principal amount is generally not taxed again, as it has typically already been subject to income tax before you deposited it. The tax applies instead to the earnings generated by that principal.

The interest earned on a savings account is considered taxable income by the IRS. This interest is taxed as ordinary income, similar to wages you might earn from a job. Your specific tax rate on this interest depends on your overall income and filing status, falling within federal income tax brackets which range from 10% to 37%. The concept of “constructive receipt” applies to this interest, meaning that interest is taxed in the year it is credited to your account, even if you do not withdraw the funds. If interest is earned and added to your account balance, it is considered taxable for that year, regardless of whether you access it. This ensures earnings are accounted for in the tax period they become available to the account holder.

Reporting Savings Account Interest

Financial institutions are generally required to report interest paid to account holders to the IRS. This reporting is primarily done through Form 1099-INT, a tax form used to report interest income. Banks and other financial institutions issue this form to you and the IRS if the interest earned on your savings account, or other interest-bearing accounts, totals $10 or more in a calendar year.

You typically receive Form 1099-INT by January 31st of the year following the tax year in which the interest was earned. Even if you earn less than $10 in interest and do not receive a Form 1099-INT, you are still legally required to report all interest income on your federal income tax return. For most taxpayers, this interest is reported on Form 1040. If your total taxable interest from all sources exceeds $1,500, you will also need to complete and attach Schedule B (Interest and Ordinary Dividends) to your tax return.

Key Considerations for Savings Account Taxation

Interest earned from various types of interest-bearing accounts is generally treated the same for tax purposes as traditional savings accounts. This includes high-yield savings accounts, money market accounts, and Certificates of Deposit (CDs). Interest from high-yield savings accounts is taxed at your ordinary income tax rate, just like interest from standard savings accounts. Interest from money market accounts and CDs is also considered taxable income and is subject to federal income tax at your ordinary income tax rates.

For a multi-year CD, for example, you would report and pay taxes on the interest accrued each year, rather than waiting until the CD matures. In addition to federal taxes, interest income from savings accounts may also be subject to state and, in some cases, local income taxes, depending on where you reside. This can vary by jurisdiction, so checking specific state tax regulations is advisable.