Do You Pay Taxes on a Savings Account?

Interest earned on a savings account is generally considered taxable income. While savings accounts offer a secure way to accumulate funds and generate returns, their earnings often have tax implications. Understanding these is important for managing personal finances and complying with tax regulations.

Understanding Taxable Interest

Interest earned on funds in a savings account is generally considered taxable income by the Internal Revenue Service (IRS). This applies to various savings vehicles, including traditional savings accounts, high-yield savings accounts, money market accounts, and certificates of deposit (CDs). Tax applies whether the interest is immediately withdrawn or allowed to compound within the account. Most interest income is taxed at the same federal income tax rate as an individual’s earned income, aligning with their tax bracket; many states also impose taxes on interest income. Only the interest earned is subject to taxation, not the original principal amount deposited.

Receiving Your Tax Statements

Financial institutions report interest income to both account holders and the IRS. If an individual earns $10 or more in interest from a financial institution during the calendar year, the institution must issue a Form 1099-INT, Interest Income. This form, typically sent by January 31, details the total interest earned from that specific institution. Box 1 of Form 1099-INT shows the total interest income to be reported.

Even if interest earned is below $10 and a Form 1099-INT is not received, it is still taxable income and must be reported on a tax return. Financial institutions also send a copy of the 1099-INT to the IRS, allowing the agency to cross-reference reported income. If a 1099-INT is expected but not received, or if the amount seems incorrect, individuals should contact their financial institution or check their account statements to determine the exact interest earned.

Reporting Interest Income

Taxpayers must include their taxable interest income on their federal income tax return. For most, interest income is reported directly on Form 1040, specifically on line 2b. If total taxable interest from all sources exceeds $1,500, Schedule B (Form 1040), Interest and Ordinary Dividends, must be completed and attached to the tax return.

Schedule B details interest income sources, requiring the name of each payer and amount received. Information from Form 1099-INT, especially Box 1, is entered into Schedule B or directly onto Form 1040. Even if no Form 1099-INT was received, any interest income, regardless of the amount, must still be reported. Tax preparation software can assist in completing Schedule B and transferring the information to the main tax form.

Situations Where Interest May Not Be Taxed

While most savings account interest is taxable, certain scenarios allow for different tax treatments. One instance involves very small amounts of interest; though taxable, amounts under $10 may not trigger a Form 1099-INT. Despite not receiving the form, individuals remain responsible for reporting these small amounts.

Interest earned within specific tax-advantaged accounts receives different tax treatment. For example, earnings in retirement accounts like Traditional IRAs or 401(k) plans are tax-deferred, meaning taxes are not paid until funds are withdrawn in retirement. Similarly, earnings in a 529 college savings plan grow federally tax-deferred and can be withdrawn tax-free if used for qualified education expenses. These accounts are structured to provide tax benefits based on their purpose, contrasting with the immediate taxability of interest in standard savings accounts.