Do You Have to Pay Taxes on a Savings Account?

Many individuals utilize savings accounts to grow their funds, often wondering about the tax implications of the interest earned. This article will clarify the general rules and common scenarios concerning the taxability and reporting of interest from savings accounts.

General Taxability of Savings Account Interest

Interest income generated from a savings account is considered taxable income by the Internal Revenue Service (IRS). This interest is typically taxed as ordinary income, meaning it is added to your total income for the year and taxed at your marginal income tax rate. Your specific tax rate depends on your overall income level and filing status.

The concept of “constructive receipt” is important in determining when this income is taxable. Interest is considered constructively received and thus taxable in the year it is credited to your account, even if you do not physically withdraw it. This doctrine means income is taxable when it is made available to you without substantial restrictions or limitations. For instance, if interest is credited to your account on December 31st, it is taxable in that year, even if you do not access it until the following year.

Reporting Savings Account Interest

Taxpayers must report all interest income, regardless of the amount, on their federal income tax return. Financial institutions generally issue Form 1099-INT, Interest Income, to account holders who earn $10 or more in interest during the calendar year. This form details the total interest earned and other relevant information, which is necessary for accurate tax reporting.

If you receive a Form 1099-INT, you will use the information provided to report your interest income. For those with total taxable interest from all sources exceeding $1,500, this income is typically reported on Schedule B, Interest and Ordinary Dividends, which is then attached to Form 1040. If your total interest income is $1,500 or less, you can usually report it directly on Form 1040. Even if you earn less than $10 in interest and do not receive a 1099-INT, you are still responsible for reporting that income.

Specific Considerations for Savings Account Interest

State income taxes may also apply to savings account interest, with rules varying by jurisdiction. Many states consider interest from savings accounts to be taxable income, similar to federal treatment. It is important to understand the specific tax laws in your state of residence.

The “Kiddie Tax” rules can affect interest earned in a child’s savings account. If a child’s unearned income, which includes interest, exceeds a certain threshold, a portion of it may be taxed at their parents’ marginal tax rate rather than the child’s lower rate. This threshold can change annually, but generally, if a child’s unearned income surpasses approximately $2,500, these rules may apply.

For jointly held savings accounts, the interest earned is generally attributed to each owner based on their contributions or ownership percentages. In the absence of a clear agreement, the income is often presumed to be split equally between the joint owners for tax purposes. Each joint owner is responsible for reporting their share of the interest income on their individual tax return.