Taxation on Savings Accounts: How It Works

Understanding how interest on your savings account is taxed is crucial. Regardless of the amount, you must report it to the IRS and pay taxes according to your tax bracket. This taxable income includes interest earned from various accounts, such as traditional savings accounts, high-yield savings accounts (HYSAs), CDs, and money market deposit accounts.

Key Takeaways

• Any interest accrued in a savings account counts as taxable income.
• If you earn over $10 in interest, your bank will issue a 1099-INT form.
• Even if your interest earnings are under $10, they still need to be reported.
• Interest from savings accounts adds to your taxable income for the year it is paid.

How Interest from Savings Accounts Is Taxed

While savings accounts aren’t typically seen as investments, they generate income through interest, which the IRS classifies as taxable income. This is true whether you leave the interest in the account, transfer it to another account, or withdraw it. Once the bank credits interest to your account within the tax year, you are responsible for paying taxes on it. The interest earned is taxed at your ordinary income tax rate for that year, which, as of the 2024 tax year, ranges from 10% to 37%.

If your interest earnings surpass $10, your financial institution will send you a 1099-INT form to report the amount early in the following year. Even if you don’t receive this form, reporting all interest income, no matter how small, is a straightforward process.

Should your net investment income (NII) or modified adjusted gross income (MAGI) exceed a certain threshold, your interest income might also be subject to the net investment income tax.

If you receive a cash bonus for opening a savings account, you will owe income tax on that bonus, and your bank will include this amount on your 1099-INT form.

What Is Not Taxed on a Savings Account?

Although the interest you earn on savings accounts is taxed, the principal amount—the original sum you deposited—is not subject to further taxation because it has already been taxed.

For example, suppose you have $10,000 in a savings account earning 0.2% interest. In that case, you will only be taxed on the $20 interest earned, not the $10,000 principal amount.

Types of Account Interest That Are Not Taxed

Certain accounts allow interest to accrue tax-deferred, meaning you don’t have to report the earnings as taxable income each year. These include traditional and Roth individual retirement accounts (IRAs). With a traditional IRA or 401(k), the principal and interest taxes are deferred until after retirement, meaning you don’t owe taxes on the account’s earnings until you withdraw the money.

In contrast, with a Roth IRA, you’ve already paid taxes on your deposited money. Therefore, as long as you withdraw the funds after age 59½, you won’t owe taxes on either the principal or the interest earned.

Interest earned on 529 plans, designed to save for educational expenses, is also not taxed.

How to Pay Taxes on a Savings Account

Your bank will send you a Form 1099-INT each year detailing the interest earned during the previous year. This form may sometimes be part of a more significant statement from a brokerage. The interest amount shown on this form should be reported as taxable income, and you will be taxed according to your income bracket.

Frequently Asked Questions (FAQs)

How Is Savings Account Interest Taxed?

Interest from a savings account is taxed as ordinary income for the year it is paid. As of the 2024 tax year, these rates range from 10% to 37%.

What Kind of Form Reports Savings Account Interest?

Your bank will send you a 1099-INT form at the beginning of each year, which details the interest earned from your savings account in the previous year. In some cases, this form may be included in a more significant statement from a broker.

Do I Have to Report Interest Earned Under $10?

Adhere to IRS regulations and report all interest income, regardless of the amount, even if your bank still needs to send you a 1099-INT form.

Does the IRS Check Your Savings Account?

The IRS can access your savings account information, although they won’t investigate your accounts unless you’re being audited. It’s best to assume the IRS is aware of all your bank accounts and report any interest income accordingly.

How Can I Avoid Paying Taxes on Savings Interest?

To minimize your tax burden while growing your savings, you can use tax-advantaged retirement accounts like a Roth IRA or Roth 401(k). With these accounts, you pay taxes on your contributions upfront, but the earnings grow tax-free, and withdrawals are also tax-free.

Is There a Limit to How Much Money You Can Have in Your Bank Account Without Being Taxed?

There’s no specific limit to how much money you can keep in a bank account without being taxed on it. However, suppose you deposit $10,000 or more. In that case, your bank will report it to the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) via a currency transaction report (CTR).

Is Interest Earned in a Checking Account Taxable?

Yes, interest earned in a checking account is taxable, just like in a savings account. If you earn more than $10 in interest, you should receive a 1099-INT form, and the amount must be reported as part of your gross income on your tax return.

The Bottom Line

Interest earned in high-yield or other savings accounts is subject to taxation, even if the amount is minimal. By comparing interest rates across different savings options, you can find accounts that offer the highest yields and help maximize your earnings, thereby taking a proactive approach to your finances.