6 Savings Account Tax Rules You Need To Know
Written by
Elizabeth Constantineau, AI Editor
Edited by
Elizabeth Constantineau
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Savings accounts are essential tools in personal finance, often used for emergencies or future goals. Yet, the tax implications of these accounts are not widely known. High-yield savings accounts and other interest-bearing accounts come with specific tax rules that are crucial to understand. Read on to learn more.
6 Important Savings Account Tax Rules
As tax season approaches, it’s crucial to understand the key tax rules associated with savings accounts. Knowing these rules ensures that you can accurately report any interest income and comply with tax regulations.
Rule 1: Savings Account Interest is Taxable Income
Does savings count as income? Interest earned on savings accounts, including regular, high-yield, money market accounts and CDs, is considered taxable income by the IRS. This interest must be reported on your tax return, and the amount of tax due will depend on your overall income tax bracket.
Rule 2: Report Interest Income on Federal Taxes
Interest and dividends from savings accounts are treated as regular income, similar to job earnings. You are required to report any interest earned in the previous year on your federal tax return, with the tax amount being dependent on your income tax bracket.
Rule 3: State-Level Taxation May Apply
In addition to federal taxes, you may need to pay state taxes on interest earned from your savings account. Tax rates and policies vary by state, so it’s important to understand the requirements in your area.
Rule 4: Federal Tax Rates Apply to Interest Income
The federal tax rate on savings account interest aligns with your regular income tax rate. For 2023, these rates range from 10% to 37%, based on your income level. High-income earners should also be mindful of the net investment income tax, an additional 3.8% tax on savings account interest if your adjusted gross income exceeds certain thresholds.
Rule 5: Tax-Advantaged Accounts Can Minimize Tax Burden
You can’t avoid taxes on interest from traditional savings accounts, but using tax-advantaged accounts like IRAs, 401(k)s, Roth IRAs, HSAs and 529 college savings plans can reduce your tax liability on the interest earned.
Rule 6: Filing Taxes for Interest Earnings
Expect to receive a Form 1099-INT from your bank if you’ve earned $10 or more in interest. This form will detail your total interest earnings for the year. Report this interest alongside your other taxable income on Form 1040, and if necessary, itemize on Schedule B.
Bottom Line
While earning interest on savings accounts is a beneficial way to accrue passive income, it’s essential to be aware of the federal and state tax implications. Keeping these rules in mind and considering tax-advantaged accounts or strategies can help you effectively manage your tax liabilities and make the most of your savings strategy.
FAQ
Here are the answers to some of the most frequently asked questions regarding taxes and savings accounts.- Is a savings account considered income?
- Yes, the interest earned from a savings account is considered income by the IRS. It is categorized as interest income and is taxable at the federal level. The principal amount you deposit in the savings account is not considered income, but the interest it generates annually is.
- What money does not count as income?
- Money that does not count as income includes loan proceeds, gifts, inheritances and money you contribute to retirement accounts like 401(k)s or IRAs -- although withdrawals from these accounts may be taxable. Additionally, certain types of insurance payouts and rebates are also not considered income.
- How do I avoid paying taxes on my savings account?
- It is not possible to completely avoid paying taxes on the interest earned from a traditional savings account. However, you can reduce the tax impact by keeping your money in accounts that offer tax advantages, such as Roth IRAs, HSAs or 529 college savings plans, where the interest accumulates tax-free or is taxed differently.
Information is accurate as of Jan. 18, 2024.Â
Editor's note: This article was produced via automated technology and then fine-tuned and verified for accuracy by a member of GOBankingRates' editorial team.
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- Forbes. 2023. "Is Savings Account Interest Taxable?"
