If you have that much money in your savings account, you probably have to pay taxes

savings account tax

savings account tax

You are required to report and pay federal taxes on any interest income you receive from a savings account. The income is taxed as unearned, which means you’ll escape payroll taxes, but you’ll have to pay federal income tax at your regular rate. Banks and other financial institutions report your interest income on a Form 1099-INT if it’s more than $10.

Consider speaking with a financial advisor to understand how interest income on savings accounts may be taxed.

Taxes on savings accounts

The money you deposit into a regular savings account has already been taxed, and you won’t have to pay taxes when you withdraw it to spend or invest. But interest on savings accounts is considered revenue by the IRS. This also applies if you do not withdraw interest from the account.

Interest paid on nearly all bank accounts, including savings, checks, money market accounts, and certificates of deposit, is taxable. Taxable income also includes dividends on deposits or shared accounts with credit unions, cooperative banks, savings and loans and mutual savings banks.

Federal income taxes payable on savings account interest are calculated as a percentage of your taxable income under the current federal income tax brackets. These range from 10% to 37% depending on income level.

Although you owe income taxes on savings account interest, income is not considered earned income, like wages and salary. As unearned income, it is not subject to payroll taxes, including Social Security and Medicare taxes. However, you may also have to pay state income taxes in addition to the federal levy.

While you typically will be charged a fee for any interest your savings account earns, you won’t have to be taxed on the balance of money you keep in your account. You should have paid tax on that money before you put the money into that account, so it won’t be taxed again just for staying in the account.

How to file taxes on earned interest

savings account tax

savings account tax

The financial institution that holds your savings account is required to report to the IRS any interest payments totaling more than $10 for the year, using Form 1099-INT. Your bank or other payer is required to send you a copy of the form by the end of January. You may receive it in the mail or it may be available as a document accessible through your online account. The amounts on this form are required to properly file your taxes.

Sometimes you may not get a 1099-INT. However, this does not relieve you of your responsibility to declare and pay interest taxes. This is true even if the interest is less than $10. If it’s less than $10, the bank won’t send you a form. If so, you may need to look at your bank statements and add up all the interest you’ve received to know how much to report on your tax return. Failure to disclose interest income may be subject to penalties and interest.

If your bank didn’t send you a 1099-INT because you didn’t provide a Social Security number when opening your account, you may be subject to withholding tax. When that happens, the bank will keep 24% of your interest to pay the taxes you owe. You may also be subject to withholding tax if you have provided a claimed Social Security number or have not previously filed a return.

Savings accounts that don’t tax interest

Some banks offer a special type of savings account, called an IRA savings account, that allows you to deduct any deposits you make into the account from your current income. The interest income on these IRA savings accounts accrues without being taxed, as long as you don’t withdraw it.

However, once you take money, including interest, out of your IRA savings, it becomes taxable as income. Also, if you withdraw from an IRA savings account before the age of 59 1/2, you’ll have to pay an additional fee.

Some savings accounts for educational purposes, such as Coverdell savings accounts and 529 plans, also earn tax-free interest. You will not pay taxes on the interest from these accounts as long as the money is used for education. You can’t use the money in these accounts for non-educational purposes, which may make it difficult for some if you’re looking to get money out of your savings for multiple reasons.

The last option for getting a tax-free savings account is to open a Health Savings Account (HSA) or Flexible Spending Account (FSA). Both are used to pay for healthcare bills but have slightly different rules. The balance of a health savings account can be carried over from year to year, but in order to open one, you must have a high deductible health plan. An FSA, on the other hand, has a balance that must be used by the end of the year.

Bottom line

savings account tax

savings account tax

Interest on savings accounts is taxed as income by the federal government. Interest earnings over $10 are reported to the IRS and to you by the bank or other institution where the money is deposited using a Form 1099-INT. However, you are required to report all interest received on your tax return, even if it’s less than $10 and whether or not you receive a 1099-INT. Interest income is exempt from payroll taxes, but you will pay income taxes at your regular rate.

Savings tips

  • A financial advisor can help you assess your tax situation. The free SmartAsset tool The free tool matches you with up to three financial advisors serving your area, and you can interview your advisors at no cost to decide which one is right for you. If you are ready to find an advisor who can help you achieve your financial goalsit starts now.

  • You don’t need to use just one savings account. In fact, you can use a number of accounts to help you with different things. For example, you may want to keep your emergency fund in a high-yield savings account, but you may also want to open an HSA by keeping your retirement savings in an IRA account. This can all get complicated pretty quickly, so you can use a savings calculator to help you figure out how much should be in each account.

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The post How savings accounts are taxed first appeared on the SmartAsset Blog.

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