Do I Have to Pay Taxes on a Money Market Deposit Account?

When your money grows, so does your tax bill.

When your money grows, so does your tax bill.

A money market deposit account usually gives you more bang for your buck than a regular savings account. A money market account normally pays higher interest, and it also allows you to write three checks each month and make in-person withdrawals. However, don't make plans for that extra interest too fast. Like interest on a regular savings account, you must pay income taxes on it.

Money Market Account Interest

Ads for money market deposit accounts normally list both the annual percentage rate, and the annual percentage yield. The APR is the simple interest rate, but the APY includes interest on the earnings. With a money market account, you don't get any guaranteed rate, however, because the bank can change it at any time based on economic conditions. Another catch is that money market accounts sometimes pay tiered rates, which depend on your balance. For example, a bank may pay one rate for a $1,000 balance, a higher rate for a $10,000 balance and still a higher rate for a $20,000 balance.

Taxable Interest

All the interest you receive on money market deposit accounts is taxable, even if the savings institution calls it "dividends," according to the Internal Revenue Service. Types of institutions covered by this law include banks, cooperative banks, credit unions, savings and loans and mutual savings banks.

Total Interest

The IRS requires banks and credit unions to send you paperwork to help keep you honest. If you earn more than $10 in interest at one institution, you should get a Form 1099-INT showing your interest for the tax year. A copy is also provided to the IRS. If you do not receive this form, call the institution with which you have an account and request it. You may also find the annual interest on the January statement for your account.

Filing Interest Income

Get the paperwork right to help keep the IRS happy. Report your total interest from all Forms 1099-INT and account statements on line 8a of Form 1040 or Form 1040A, or on line 2 of Form 1040EZ. If you have more than $1,500 total, you must also complete Schedule B, listing the name of each bank and the interest received on line 1 of Part 1. Write the total on line 6, and enter that number on line 9a of Form 1040 or 1040A. You can't use Form 1040EZ if you have more than $1,500 in interest. Hold onto your Forms 1099-INT. The IRS doesn't require their inclusion with your income tax return.

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