Is the Interest on a Savings Account Taxable?

Savings accounts are perfect for holding your emergency fund because you can earn a little interest without having to worry that you might lose money, since the savings account is protected by FDIC insurance. However, you will have to share some of the interest income you earn with Uncle Sam because the tax code treats savings account interest income as part of your taxable income.

Knowing how to report the interest from your savings account and how to estimate how much you’ll have to pay helps you avoid tax penalties. It also helps you avoid being unable to pay what you owe when your income tax return is due, since your bank usually won’t withhold any of the interest for income taxes.

Any bank or financial institution that pays you $10 or more in interest during the year is required to submit a Form 1099-INT to both you and the IRS to document the interest income. For example, if you earn $15 in interest income on your savings account, you’ll receive a Form 1099-INT, but if you only receive $5 of interest income on your savings account during the year, your bank isn’t required to send you one. However, regardless of whether you receive a Form 1099-INT or not, the IRS requires you to report all of your savings account interest income on your tax return.

Most interest income, including interest on your savings account, is taxed as ordinary income on your federal income tax returns. That means that the higher your tax bracket, the higher the rate you’ll pay on your interest. Unlike long-term capital gains, your interest income isn’t taxed at a lower rate. For example, if you have $100 in interest and fall in the 32 percent tax bracket, you’ll pay $32 in taxes on your interest income. If you’re only in the 12 percent tax bracket, you’ll pay just $12 on the same $100 of interest income.

If you receive more than $1,500 in total interest income during the year, you’re required to detail the sources of the interest income on Schedule B. For example, if you earned $300 in interest from your savings account and $1,300 in interest from certificates of deposit, your total interest income for the year equals $1,600, requiring you to file Schedule B. In addition, you must file your tax return with Form 1040.