Do You Pay Taxes on a Savings Account?
Interest earned on a savings account is generally taxable. Learn the fundamentals of why it's considered income and what your reporting responsibilities are.
Yes, the interest earned in a savings account is considered taxable income by the Internal Revenue Service (IRS). This applies to the earnings generated, not the principal amount you deposit. For most standard savings vehicles, any interest credited to your account within a tax year must be reported to the government as income.
The money your balance generates is viewed by the IRS as a form of income, similar to wages from a job, though it falls into a different category. The specifics of how and when to report this income involve specific forms and reporting thresholds.
Understanding Taxable Interest
The IRS classifies earnings from a savings account as unearned income, meaning it is money generated from your financial assets rather than from direct labor. This income is taxed at your ordinary income tax rate, the same set of rates that apply to your salary or wages. Your specific tax rate depends on your total taxable income and filing status for the year.
This principle extends beyond traditional savings accounts. Interest earned from other common bank products, such as certificates of deposit (CDs) and money market accounts, is also treated as taxable income. The underlying concept is consistent: if a financial institution pays you for holding your money, that payment is considered income.
It is a common misconception that if the amount of interest earned is small, it does not need to be reported. However, the law requires that all interest income be reported, regardless of the amount. The reporting requirements for financial institutions do not change an individual’s responsibility.
The Role of Form 1099-INT
Financial institutions report the interest they pay you to both you and the IRS using Form 1099-INT, Interest Income. This document is the official record of the interest you have earned from a specific source over the calendar year. You will typically receive this form by early February of the year following the one in which the interest was earned.
A bank or credit union is only required to send you a Form 1099-INT if you earned $10 or more in interest during the year. This rule does not alter your personal tax liability. Even if you earn less than $10 in interest and do not receive a Form 1099-INT, that income is still taxable and must be reported.
Box 1 on Form 1099-INT shows the total taxable interest paid to you. If you do not receive an expected form, check your year-end bank statements to determine your interest earnings and contact the financial institution. If you notice an error on the form, request a corrected version from the issuer.
How to Report Interest Income
When filing your federal income tax return, you must include all taxable interest you received. Most filers report this information directly on Form 1040, the U.S. Individual Income Tax Return. The total taxable interest from all your accounts is entered on the designated line.
If your combined taxable interest is more than $1,500 for the tax year, a different procedure applies. You must also complete and attach Schedule B, Interest and Ordinary Dividends, to your tax return. This schedule requires you to list each individual payer of interest and the amount received from each one.
After reporting the interest at the federal level, you may also have obligations at the state level. Most states with an income tax also tax interest income earned by their residents. You should consult your state’s tax authority for specific rules and rates.