Do Savings Accounts Get Taxed? How to Report Interest
Navigate the taxation of savings account interest, understanding how banks report it and how to accurately include it on your tax return.
The interest income generated from most traditional savings accounts is subject to taxation. This applies to a range of interest-bearing accounts, including those held at banks and credit unions.
Understanding Taxable Interest Income
Interest income from savings accounts represents money earned from deposits, which financial institutions pay to account holders. This category extends beyond basic savings accounts to include earnings from money market accounts, certificates of deposit (CDs), and even interest-bearing checking accounts. These earnings are treated as “ordinary income” for tax purposes, subject to federal income tax at an individual’s marginal tax rate, the same rate applied to wages or salaries.
The taxation of interest income occurs in the year it is credited to the account, even if the funds are not withdrawn. For example, if interest is added to your savings account balance in December, it is considered taxable income for that calendar year. While the primary focus is on federal income tax, some states and local jurisdictions may also impose taxes on interest income. Specific state and local tax rules can vary, so it is advisable to consult local guidelines.
Bank Reporting and Your Tax Forms
Financial institutions are required to report interest paid to their customers to both the account holder and the Internal Revenue Service (IRS). The specific tax form used for this purpose is Form 1099-INT, Interest Income. This form details the amount of interest earned during the calendar year.
A Form 1099-INT is typically sent to anyone whose interest earnings exceed $10 or more. It is also issued if any federal income tax was withheld from the interest payments, regardless of the amount. This form provides information, including the total interest income and any federal tax withheld by the institution. Financial institutions are generally required to send out these forms by January 31st each year.
Reporting Savings Account Interest on Your Tax Return
When preparing your federal income tax return, the interest income reported on Form 1099-INT must be included. For most individuals, the total interest amount from their Form 1099-INTs is entered directly on Form 1040, the main federal income tax form.
If your total taxable interest income from all sources exceeds $1,500 in a year, you must also report it on Schedule B, Interest and Ordinary Dividends. Schedule B provides a detailed breakdown of the sources of your interest income, listing each payer and the amount received. Even if you do not receive a Form 1099-INT because your interest earnings were below the $10 reporting threshold, the income is still considered taxable and must be reported on your tax return.