Do You Have to Pay Taxes on Interest From Savings Account?

Interest earned from savings accounts is generally considered taxable income by the IRS. This article clarifies how interest income from savings accounts is taxed and reported. Understanding these tax implications is important for managing finances and ensuring tax compliance.

Understanding Taxable Savings Account Interest

Interest income from savings accounts is classified as ordinary income, similar to wages. It is subject to federal income tax at your regular rate. Depending on state laws, this interest may also be subject to state income tax. This tax treatment applies to various types of interest-bearing accounts, including traditional savings accounts, high-yield savings accounts, money market accounts, and certificates of deposit (CDs).

Interest is taxed in the year it is credited to your account, even if you do not withdraw the money. For instance, if you have a CD with a term longer than one year, you owe taxes on the interest earned each year, not just when the CD matures. Only the interest portion is taxed; the principal amount deposited is not considered taxable income.

Receiving Your Tax Statement (Form 1099-INT)

Financial institutions are required to report interest income paid to their account holders. The primary document for this reporting is Form 1099-INT. This form is sent to both you and the IRS, detailing the interest you earned during the tax year.

A Form 1099-INT is issued if you earn $10 or more in interest from a single financial institution in a calendar year. The form includes information including the payer’s name, your name, the total amount of interest income, and any federal tax withheld. Expect to receive this form by January 31st of the year following the tax year. If you did not receive a Form 1099-INT or if the information is incorrect, first contact the financial institution. If you still cannot obtain the form, contact the IRS for assistance.

Reporting Interest on Your Tax Return

Use your Form 1099-INT information to report interest income on your federal income tax return, Form 1040. If your total taxable interest income from all sources is $1,500 or more, complete and attach Schedule B to your Form 1040. This threshold applies to the aggregate total of all interest and ordinary dividends received, not just from individual accounts.

If your total interest income is less than $1,500, you can report it directly on the appropriate line of your Form 1040 without filing Schedule B. When using tax software, enter the details from your Form 1099-INT into the designated sections. The software will then calculate and place the information on the correct forms.

Key Points for Accurate Reporting

Even if a financial institution does not issue a Form 1099-INT (e.g., if interest earned is less than $10), the income is still taxable and must be reported on your tax return. You can use your year-end statements or contact your bank to determine the exact amount of interest earned. Maintaining accurate records of all interest income received, regardless of the amount or whether a form was issued, is important for tax compliance.

For joint savings accounts, the Form 1099-INT is issued under the Social Security number of the primary account holder. However, the income may need to be split and reported by each joint owner, depending on how they share ownership. If you received a Form 1099-INT for interest belonging to someone else or a joint account, you may need to report the full amount on Schedule B and then subtract the portion belonging to others as a “nominee distribution.”