Do I Have to Pay Taxes on a Savings Account?

Many people wonder if the interest earned on their savings accounts is subject to taxation. In most situations, the interest you accumulate in a savings account is considered taxable income. This article will clarify how interest income is taxed, the forms you might receive, and the process for reporting this income on your tax return.

Understanding Taxable Interest Income

Interest income generated from a savings account is generally treated as ordinary income for federal tax purposes. This means it is taxed at your regular income tax rates, similar to wages or salaries. The interest is typically considered taxable in the year it is credited to your account, regardless of whether you withdraw the funds or leave them to compound. Even small amounts of interest are technically taxable, though reporting requirements may vary. Depending on your state of residence, this interest income may also be subject to state income taxes.

This taxation applies to various types of interest-bearing accounts beyond traditional savings accounts, including money market accounts and certificates of deposit (CDs). Whether the interest is automatically reinvested into the account or paid out to you, it still counts as income.

Receiving Your Tax Form 1099-INT

Financial institutions, such as banks and credit unions, are generally required to report interest payments to both you and the IRS. They do this by issuing Form 1099-INT, “Interest Income.” This form is typically sent to account holders by January 31st each year if the interest earned on an account amounts to $10 or more in the previous calendar year. The $10 threshold applies to the total interest paid to an individual under a single tax identification number across all accounts at that institution.

The Form 1099-INT provides important details for tax reporting, including the payer’s name, your name, and the total amount of interest income received in Box 1. However, even if you do not receive this form, any interest earned, regardless of the amount, remains taxable and must be reported on your tax return.

Reporting Interest Income on Your Tax Return

Once you receive your Form 1099-INT, you will use the information to report your interest income when filing your federal income tax return. The amount shown in Box 1 of your Form 1099-INT, representing your taxable interest, is typically entered on the appropriate line of your Form 1040.

If your total taxable interest income from all sources exceeds $1,500 for the tax year, you are generally required to file Schedule B, “Interest and Ordinary Dividends,” with your Form 1040. On Schedule B, you will list each payer and the amount of interest received from them. The total interest from Schedule B is then transferred to your Form 1040. If your total interest income is $1,500 or less, you can typically report it directly on your Form 1040 without needing to file Schedule B.

Special Considerations for Certain Accounts

While most savings account interest is taxed straightforwardly, some situations involve specific rules. For minor’s accounts, such as custodial accounts, interest income may be subject to what is known as the “Kiddie Tax.” This rule applies if a child’s unearned income, including interest, exceeds certain thresholds. For example, if a child’s unearned income exceeds certain thresholds, it may be taxed at the parent’s marginal tax rate rather than the child’s lower rate.

For jointly held savings accounts, the interest income is typically considered to be earned by both account holders. The financial institution usually issues a single Form 1099-INT under the primary account holder’s Social Security number. However, the joint owners are responsible for reporting their respective shares of the income on their individual tax returns.

In contrast to standard savings accounts, some types of interest, such as that earned from certain municipal bonds, may be exempt from federal income tax and, in some cases, state and local taxes. This tax-exempt status, however, does not generally apply to interest earned on traditional savings accounts.