Do You Have to Pay Taxes on Interest Earned in a Savings Account?
Learn how interest earned in savings accounts is taxed, how to report it, and what to consider with joint accounts.
Interest earned on savings accounts is a common form of passive income for many individuals. While it may seem like a straightforward financial gain, the associated tax implications are often overlooked or misunderstood. Understanding these obligations is crucial to ensure compliance and avoid penalties.
Types of Interest Subject to Tax
Interest income comes in various forms that are taxable under U.S. tax laws. The most common is interest from savings accounts, which is considered ordinary income and taxed at the individual’s marginal tax rate, ranging from 10% to 37% for the 2024 tax year. This income is reported on Form 1099-INT, issued by financial institutions to both the account holder and the IRS.
Other interest-bearing accounts and instruments also generate taxable income. Certificates of Deposit (CDs) accrue interest that is taxable in the year it is credited, even if not withdrawn. Money market accounts and U.S. Treasury securities also generate taxable interest, though Treasury securities are exempt from state and local taxes, which can benefit residents of states with high income tax rates.
Interest from municipal bonds is generally exempt from federal taxes and often state taxes if the bond is issued within the taxpayer’s state. However, certain municipal bonds, known as private activity bonds, may be subject to the Alternative Minimum Tax (AMT), ensuring that high-income individuals pay a minimum amount of tax.
How Financial Institutions Provide Tax Documents
Financial institutions issue Form 1099-INT for interest earned totaling $10 or more during the tax year. This form summarizes the total interest earned and any federal income tax withheld, providing taxpayers with the necessary details to report their income.
Form 1099-INT is sent to account holders by January 31st of the following year to align with tax filing deadlines. Financial institutions also submit this information to the IRS for verification purposes. Many banks now offer electronic delivery of these documents, which can be accessed through online banking platforms. Account holders must consent to electronic delivery, which reduces the risk of lost or delayed mail.
Reporting on Your Tax Return
Accurate reporting of interest income on your tax return is essential. Information from Form 1099-INT is typically transferred to Schedule B of Form 1040, used for reporting interest and ordinary dividends. Discrepancies between reported amounts and IRS records can trigger audits or inquiries.
If interest income exceeds $1,500, Schedule B requires a breakdown of sources, including banks, credit unions, and other financial institutions. Taxpayers must also disclose foreign accounts or trusts, adding complexity to the process. This transparency helps prevent tax evasion through unreported offshore accounts.
Taxpayers should also review their 1099-INT forms for any federal tax withholding on interest income. While some financial institutions withhold taxes, this is not universal. Proper reporting of withheld taxes is critical for calculating total tax liability and determining potential refunds.
Joint Accounts and Multiple Ownership
Tax obligations for joint accounts depend on how ownership is divided. Typically, each account holder is responsible for reporting an equal share of the interest income unless otherwise specified. For example, if an account generates $1,000 in interest and has two joint owners, each reports $500 on their tax returns.
Ownership percentages or differing tax jurisdictions among account holders can complicate the allocation of interest income. Clear agreements regarding shares are vital to prevent disputes and ensure compliance with tax laws. In community property states, married couples may face different reporting requirements, adding another layer of complexity.