Do I Pay Taxes on Interest From a Savings Account?

Interest earned from funds held in a savings account constitutes taxable income. The Internal Revenue Service (IRS) considers these earnings as ordinary income. Understanding how this income is treated for tax purposes helps individuals properly manage their financial obligations.

Understanding Taxable Savings Account Interest

Interest income from various financial products, such as traditional savings accounts, money market accounts, and certificates of deposit (CDs), is subject to federal income tax. This applies to any interest credited to your account, regardless of whether the funds are withdrawn or remain deposited. The taxation occurs in the year the interest is made available to you, even if you choose to let it compound within the account.

Financial institutions report interest income to the IRS and to account holders. A bank issues Form 1099-INT, “Interest Income,” if the total interest earned is $10 or more during the calendar year. Even if interest earned is less than $10 and a Form 1099-INT is not issued, the income is still taxable and must be reported. All interest contributes to your gross income.

Reporting Your Savings Account Interest

Financial institutions are required to provide you with Form 1099-INT by January 31st of the following year if you earned $10 or more in interest. This form details the amount of interest paid, any federal income tax withheld, and other relevant information. You will use the information provided on this form to accurately report your interest earnings on your federal income tax return.

Interest income is reported on Form 1040, U.S. Individual Income Tax Return. If your total taxable interest income for the year is $1,500 or less, and you do not have other specific reporting requirements, you can directly enter the amount on Line 2b of Form 1040. However, if your total taxable interest income exceeds $1,500, or if you have certain other types of interest, you must report it on Schedule B (Form 1040), Interest and Ordinary Dividends. The total from Schedule B is then carried over to Line 2b of Form 1040.

If you do not receive a Form 1099-INT, you are still obligated to report this income. You can determine the exact amount of interest earned by reviewing your monthly or annual bank statements.

Common Scenarios for Savings Account Interest

Interest earned on jointly held savings accounts is reported by the financial institution under the Social Security number of the primary account holder. However, the income can be allocated between the joint owners based on their respective ownership percentages. It is important for joint account holders to agree on how the income will be reported to avoid discrepancies with the IRS.

Interest income earned by a minor from a savings account is also taxable. If a child’s investment income, including interest, exceeds a certain amount, it may be subject to “kiddie tax” rules. Under these rules, the child’s unearned income above a specific threshold is taxed at the parent’s marginal tax rate, rather than the child’s potentially lower rate.

Beyond federal taxes, many jurisdictions also impose their own income taxes on savings account interest. Rules and tax rates for interest income vary among jurisdictions. Taxpayers should consult their state’s tax regulations to understand any additional reporting requirements or tax liabilities related to their savings account interest.