Do You Pay Taxes on a High-Interest Savings Account?
Navigate the tax implications of high-interest savings. Understand how your earned interest is taxed and what you need to report.
High-interest savings accounts offer individuals an opportunity to earn more on their deposited funds compared to traditional savings options. Understanding the tax implications associated with the interest earned from these accounts is important for account holders. This article clarifies how interest from high-interest savings accounts is treated for tax purposes.
The Taxability of Interest Income
Interest earned from high-interest savings accounts is considered taxable income by the Internal Revenue Service (IRS). This interest is categorized as ordinary income, meaning it is subject to the same tax rates as other forms of ordinary income, such as wages or salaries. The taxability applies to all interest earned, regardless of the amount.
Interest is recognized for tax purposes in the year it is credited to the account, not necessarily when it is withdrawn. This concept is known as constructive receipt. Under constructive receipt, income is taxable when it is made available to the taxpayer without substantial limitations or restrictions, even if they have not yet physically received it. For example, if interest is credited to your account in December, it is taxable for that year, even if you do not access the funds until the following January.
Understanding Your Tax Obligations
Interest income from a high-interest savings account is added to other ordinary income, impacting a taxpayer’s overall financial obligation. This combined income determines the taxpayer’s federal income tax liability. There is no special lower tax rate for savings account interest; it is taxed at the individual’s marginal tax rate.
Financial institutions are not required to issue a Form 1099-INT if the total interest earned is less than $10. However, even if a Form 1099-INT is not issued, the income is still considered taxable and must be reported by the taxpayer. State income tax considerations also apply to interest income, with specific rules and rates varying by state.
Reporting Interest Income
Financial institutions are required to send Form 1099-INT to account holders by January 31st of the year following the tax year if they have earned $10 or more in interest. This form details the amount of interest paid to the recipient during the calendar year. The Form 1099-INT will include information such as the payer’s name, the recipient’s name, and the total taxable interest earned in Box 1.
This interest income is reported on a federal income tax return. If the total taxable interest income from all sources exceeds $1,500, taxpayers must report it on Schedule B, which is attached to Form 1040. If the total interest is $1,500 or less, it can often be reported directly on Form 1040 without needing Schedule B.