Do You Pay Taxes on Interest Earned in a Savings Account?

Interest earned on a savings account is generally considered taxable income. Understanding its tax treatment is important for financial planning. This applies to various types of savings accounts, including traditional savings, high-yield savings, and similar interest-bearing accounts.

How Savings Account Interest is Taxed

Interest income from savings accounts is categorized as “ordinary income.” This means it is taxed at your individual marginal income tax rate, the same rate as other regular income, like wages. The specific tax rate you pay depends on your total taxable income and your tax filing status.

A key concept in the taxation of interest is “constructive receipt.” This principle dictates that income is taxable in the year it is credited to your account and made available to you, even if you do not physically withdraw the funds. For example, if interest is added to your savings account balance in December, it is considered taxable income for that year, even if you do not access it until the following year. This applies regardless of the amount.

Reporting Interest Income

Financial institutions report interest income to account holders and the Internal Revenue Service (IRS). If you earn $10 or more in interest from a single financial institution during a calendar year, the institution is required to issue you Form 1099-INT. This form details the total amount of taxable interest you received. You typically receive this form by January 31st of the following year.

Even if you do not receive a Form 1099-INT, perhaps because the interest earned was less than $10, you are still responsible for reporting all taxable interest income on your federal tax return. The IRS views all interest as taxable unless specifically exempted by law. For federal tax returns, interest income is reported on Form 1040. If your total taxable interest is $1,500 or less, you can typically report it directly on line 2b of Form 1040. If your total taxable interest exceeds $1,500, you must also complete and attach Schedule B to your Form 1040.

Common Questions About Interest Income

Interest earned on joint savings accounts is also subject to taxation, and the income is generally attributable to all account holders. Typically, the financial institution will issue a Form 1099-INT to the primary account holder. However, each joint owner is responsible for reporting their proportionate share on their individual tax return. For instance, if two individuals equally own a joint account, each would be responsible for reporting half of the interest earned. The primary account holder who receives the 1099-INT can report the full amount and then subtract the other owner’s share as a “nominee distribution” to ensure only their portion is taxed.

Other types of interest-bearing accounts, such as money market accounts and Certificates of Deposit (CDs), are taxed similarly to savings accounts. The interest earned from these accounts is also considered ordinary income and is taxed at your regular income tax rate. This tax applies even if the interest earned is automatically reinvested back into the account rather than being withdrawn.