Is Savings Account Interest Taxable?

Are Savings Accounts Taxable?

Savings account interest is taxable at the same tax rate you pay on your earned income. This includes interest you earn on regular savings, high-yield savings accounts, money market accounts and CDs, as well as dividends earned on share certificates at credit unions or savings at federal savings and loan associations.

Interest income is added to your other taxable income on your tax return and is taxed using marginal tax rates that range from 10% to 37%, depending on your tax bracket.

Learn more: How Do Tax Brackets Work?

What Isn't Taxable?

Although you do pay taxes on savings account interest, as well as any incentives you've received for opening an account, you don't pay taxes based on your account balance. If you have $10,000 in savings and earn $300 in interest on it, you'll pay taxes on $300 but not on the total $10,000 balance.

You also don't pay taxes on interest earned in certain tax-advantaged accounts, such as 529 education accounts, individual retirement accounts (IRAs) and health savings accounts. More on these accounts in the section on tax-free alternatives below.

Tip: Qualified dividends and long-term capital gains earned on investments are also taxable, but potentially at different rates than interest income. As with interest, dividends and gains may be tax-deferred or tax-free if you hold your money in a tax-advantaged account.

How to File Taxes on Savings Account Interest

Reporting interest on your tax return and calculating the tax you owe is a regular part of filing your taxes. Here are the steps to follow:

1. Gather Your Forms

Your bank or credit union will issue a 1099-INT form in late January if you've earned at least $10 in interest during the year. They'll send a copy of the 1099-INT to the IRS to report the interest income you've earned. You'll receive a separate 1099-INT form from each financial institution that paid you interest. Look for forms in the mail in late January or early February, or check your online account for tax forms.

2. Add Up the Interest

Add up the interest shown on your 1099-INTs, plus any interest you earned that was not reported on a 1099-INT. Bank statements typically show year-to-date interest if you haven't earned enough to trigger a form, or if you want to double-check the information reported on your 1099-INT.

If you have investments and receive a Schedule K-1, check forms 1065 and 1120-S for distributive shares of interest you may have received from partnerships or S corporations. Include this interest in your total.

3. Report Interest on Your Tax Return

Savings account interest is added as part of your adjusted gross income on your Form 1040. Enter your total interest for the year under "taxable interest" (line 2b). If your taxable income and dividends total more than $1,500, use Schedule B to list out each source of interest and the amount earned during the year.

4. Save 1099-INT Forms for Your Records

You don't have to submit 1099-INT forms with your tax return. Save them, along with a copy of your return and other supporting documents, for at least three years after the date of filing.

Tip: If you receive a 1099-INT with incorrect information, contact your financial institution and ask them to issue a corrected form. You want to make sure the amount reported on your 1099-INT matches the information on your tax return—and the information received by the IRS.

Tax-Free Alternatives to Savings Accounts

If you want to save but would rather minimize how much you pay in taxes, you can earn interest tax-free or tax-deferred in certain types of savings accounts. Here's a quick rundown of options to consider:

• Traditional IRA or 401(k): Traditional IRAs and 401(k)s let you save for retirement using tax-deductible contributions. Any interest you earn in a traditional IRA or 401(k) is tax-deferred: You don't pay taxes on it as long as your money stays in the account. Instead, you pay regular income taxes on qualified withdrawals in retirement. Early withdrawals (made before age 59½) may be subject to a penalty.
• Roth IRA or Roth 401(k): Roth contributions are not tax deductible, but your earnings and interest are tax-free as long as your withdrawals are qualified. Rules for withdrawing money from a Roth account are more flexible than they are for traditional IRAs and 401(k)s, but check with your account provider for details to avoid penalties.
• Health savings account: These allow you to save money toward health insurance deductibles and other unreimbursed medical and dental expenses tax-free. HSA contributions are deductible in the year you contribute. Withdrawals are also tax-free, as long as you use the money to pay for qualified expenses.
• 529 education savings plans: When you save for college or private K-12 tuition in a tax-advantaged 529 account, any interest you earn is tax-free. Contributions to a 529 aren't tax deductible, but you don't pay tax on interest or earnings within your account, and your withdrawals are tax-free as long as you use the money for qualified education expenses. In 30 states, 529 contributions make you eligible for tax credits or deductions on your state tax return. If you have unused funds in a 529, you can roll them over into a Roth in your child's name.

Frequently Asked Questions

The Bottom Line

Saving money is a good financial practice, whether you're saving for emergencies, large purchases, sending your kids to college or retirement. Paying taxes on your savings may not be fun—and it eats into your profits—but it's necessary when you're building a nest egg.

If growing your savings is part of a larger effort to optimize your overall finances, consider revisiting your monthly budget and checking your credit report and FICO^® Score^Θ. Good money habits can put you on track to save more money and meet your tax obligations as you go.