Do I Pay Tax on Interest From Savings?

Interest earned from savings accounts is generally considered taxable income by the Internal Revenue Service (IRS). This money becomes part of your overall income for tax purposes. Understanding how this interest is taxed can help you manage your financial planning.

Understanding Taxable Interest Income

Interest income refers to the earnings you receive from funds deposited in various financial accounts. This includes interest from traditional savings accounts, high-yield savings accounts, money market accounts, and certificates of deposit (CDs). Even certain checking accounts that pay interest fall under this category.

This type of income is taxed as ordinary income, similar to wages or salaries. Your specific tax rate on interest income depends on your total taxable income and filing status. Interest is considered taxable in the year it is earned or credited to your account, regardless of whether you withdraw it.

Every dollar of interest earned is taxable. Financial institutions are required to report interest earnings to the IRS only if the amount is $10 or more. Even if you do not receive a tax form for interest under this threshold, you are still responsible for reporting it on your federal income tax return.

Receiving and Reporting Your Interest Income

Financial institutions issue Form 1099-INT to report interest income. This form is sent to you by January 31st each year if you earned $10 or more in interest during the previous calendar year. The Form 1099-INT details the total amount of interest paid to you, along with the payer’s information. If you have accounts at multiple institutions, you might receive a separate Form 1099-INT from each one.

Report your interest income on your federal tax return using the information from Form 1099-INT. For most taxpayers, interest income is reported directly on Form 1040. However, if your total taxable interest from all sources exceeds $1,500, or if other specific conditions apply, you will need to complete and attach Schedule B (Interest and Ordinary Dividends) to your Form 1040. Schedule B provides a detailed breakdown of interest received from different payers.

Factors Affecting Interest Taxation

While most interest from savings is fully taxable, some types of savings have different tax treatments. For instance, interest earned on U.S. Savings Bonds, such as Series EE and Series I bonds, offers an option to defer reporting the interest income. You can choose to report the interest annually as it accrues or defer reporting it until the bond matures, is redeemed, or is disposed of, whichever comes first.

The treatment of interest income for state and local income taxes can vary. Most states tax interest income from savings accounts. However, interest from U.S. Treasury bills, notes, and bonds is subject to federal income tax but is exempt from state and local income taxes. Interest earned from municipal bonds is exempt from federal income tax. This municipal bond interest may also be exempt from state and local taxes if the bond was issued within your state of residence, though this varies by state.