Do I Have to Pay Taxes on a Savings Account?

Interest earned on savings accounts is generally considered taxable income. While the principal deposited into a savings account is not taxed again, the interest it generates becomes part of your annual income for tax purposes. This applies to most traditional savings vehicles, including standard savings accounts, money market accounts, and certificates of deposit.

Understanding Taxable Interest

Interest income from savings accounts is typically considered ordinary income by the Internal Revenue Service (IRS). This means it is subject to taxation at your regular income tax rate, similar to wages or salary. Interest is considered earned when it is credited to your account, not necessarily when you withdraw it. All interest earned, regardless of the amount, is technically taxable income. For instance, if a savings account earns a small amount like $5 in interest, that $5 is still part of your taxable income.

Receiving Tax Information

Financial institutions are generally required to inform you about the interest you’ve earned throughout the year. If you earn $10 or more in interest from a bank, brokerage, or other financial institution, they will issue you Form 1099-INT, “Interest Income.” This form is typically sent to you by January 31st of the year following the tax year in which the interest was earned. Box 1 on this form shows the total taxable interest you received. Even if you do not receive a Form 1099-INT because the interest earned was less than $10, you are still responsible for reporting that income on your tax return.

Reporting Savings Account Interest

When preparing your federal income tax return, you must include all taxable interest income. For most individuals, this interest is reported directly on Form 1040, specifically on Line 2b, which is designated for taxable interest. This line aggregates the total interest from all your savings accounts and other interest-bearing sources. 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 Form 1040. It lists the name of the payer and the amount of interest received from each, and the total from Schedule B then carries over to Form 1040.

Tax-Advantaged Savings Options

While interest from traditional savings accounts is generally taxable, several alternatives offer different tax treatments. The tax benefits vary depending on the account type and how the funds are used.

Individual Retirement Accounts (IRAs), such as Traditional and Roth IRAs, are popular options for retirement savings. Traditional IRAs offer tax-deferred growth, meaning earnings are not taxed until withdrawal in retirement, and contributions may be tax-deductible. Conversely, Roth IRAs are funded with after-tax dollars, allowing for tax-free growth and tax-free withdrawals in retirement, provided certain conditions are met.

Health Savings Accounts (HSAs) provide a triple tax advantage for those with high-deductible health plans. Contributions to an HSA are tax-deductible, the funds grow tax-free, and withdrawals are tax-free when used for qualified medical expenses.

For education savings, 529 plans offer tax-free growth and tax-free withdrawals for qualified education expenses. While contributions to 529 plans are not federally tax-deductible, the earnings accumulate without federal income tax, and distributions for tuition, fees, and other eligible costs are tax-exempt. Some states also offer tax deductions or credits for contributions to their 529 plans.