Is the Interest on a Savings Account Taxable?

Interest earned in savings accounts are subject to income tax.

Interest earned in savings accounts are subject to income tax.

Savings accounts are deposit accounts maintained at a commercial financial institution such as a bank or credit union, which provide protection to the invested money as well as pay a small amount of interest. Generally, any income earned through investments, such as a savings account, is subject to income tax.

Interest Is Income

Although you are not actively earning interest paid to you in the same manner as you earn your paycheck, the interest given to you by a bank in a savings account is taxable as income, just as wages are income. Therefore you are required to include the interest earned in these accounts on both your federal and state income tax returns.

Taxable Upon Earning Interest

The interest accrued in your savings account is subject to taxation during the year that you are paid the money by your bank. It does not matter whether you have actually accessed the funds from your account or spent the money. You must also report this interest as income even though you may have been charged other fees by your bank for using its services.

Interest Income Tax Rate

Interest income is taxed at the same rate as your regular income tax bracket. Under the tax code, the more income you make, the higher percentage the income is taxed. For example, the first $17,400 for a married couple is taxed at 10 percent in 2012. The next $53,300 is taxed at 15 percent, and income earned beyond $70,701 up to $142,700 is taxed at 25 percent. Therefore, if you earned $60,000 in 2012 and $45 in interest from a savings account, you in the 15 percent bracket, and that interest is taxed at 15 percent.

Reporting Interest Income to the IRS

Each year your financial institution may send you a 1099-INT tax form indicating how much interest you earned on your savings accounts for the prior year if you were paid more than $10 in interest on the account. You need to include this information on your tax return when you file with the IRS. If you earned more than $1,500 in interest or investment income, you also need to submit a Schedule B form along with your tax filings.


About the Author

Kevin Owen has been a professional writer since 2005. He served as an editor for the American Bar Association's "Administrative Law Review." Owen is an employment litigator in the Washington D.C. metropolitan area and practices before various state and federal trial and appellate courts. He earned his Juris Doctor from American University.

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