Is Savings Account Interest Taxable? (2024)

If you’ve parked your rainy day fund in a high-yield savings account earning a competitive interest rate, you’re probably bringing in a decent chunk of change each month or year in passive income.

This raises an important question: Is savings account interest taxable? The short answer is yes. Here are a few things you need to know about tax for savings accounts, how to file and ways to save.

Is Savings Account Interest Taxable?

Interest and dividends earned on a savings account are treated as income by the IRS. This makes it no different than the money you make from your day job. Come tax time, you’ll have to include savings account interest you earned the year you’re filing for on your federal taxes.

Your income tax bracket determines how much you can expect to be taxed on savings account interest. For example, if you make $50,000 a year, your federal tax rate is 22%. If you earn $100 in interest on a savings account, you’ll have to pay $22 in interest taxes for that year.

You may also be taxed at the state level for savings interest. Rates and policies vary, but states generally require you to pay taxes on any interest earned while you are a resident of that state. Verify this with your state or local tax office if you’re unsure.

These rules apply to all savings accounts, not just high-yield savings accounts. Regular savings accounts, money market accounts and certificates of deposit all earn taxable interest. If you keep a high balance stashed in one or many of these, consider setting funds aside for taxes.

How Much Is Tax for Savings Accounts?

Federal tax for savings accounts is assessed at the same rate as your regular income. Depending on how much money you make, you can expect to pay between 10% to 37% on savings account interest in taxes. These are the federal income tax rates and tax brackets for 2023:

High-income earners should also pay attention to the net investment income tax. This is an additional 3.8% tax that could be applied to your savings account interest if your modified adjusted gross income is above the following thresholds:

• Married filing jointly: $250,000
• Married filing separately: $125,000
• Single: $200,000
• Head of household (with qualifying person): $200,000
• Qualifying widow(er) with dependent child: $250,000

While you might not think of a savings account as an investment, they earn interest just like stocks, bonds and other assets do and are not exempt from state and federal taxes.

How To Avoid Tax From Savings Accounts

You can’t avoid paying taxes on the interest you earn from a savings account, MMA or CD. However, there are several other types of accounts that offer different tax advantages.

• Individual Retirement Accounts (IRAs). The interest you earn from a tax-deferred account like a traditional IRA isn’t reported as income in the year that you earn it. As a result, you won’t have to claim it when you file your taxes. However, when you begin taking distributions, withdrawals from a traditional IRA are taxed as income. This includes interest earnings.
• 401(k). Interest earned in an employer-sponsored retirement savings account, such as a 401(k), isn’t considered annual income either. You won’t pay taxes right away on your earnings, but you will pay taxes when you withdraw from your account at retirement. Distributions are taxed as regular income, though early withdrawals incur additional penalties.
• Roth IRAs. Unlike a traditional IRA or a 401(k), contributions to a Roth IRA are taxed upfront because you’re adding post-tax money. Then, any earnings you generate from the account—including interest—are tax-free. Interest is taxed as regular income, and you’ll incur a 10% penalty if you make a non-qualified distribution before age 59 ½.
• Health Savings Accounts (HSAs). A health savings account or HSA allows you to set aside money for current or future medical expenses. Any interest you earn in the account is tax-free, and so are qualified withdrawals. HSAs have many rules about using funds.
• 529 college savings plans. Similar to an HSA, 529 plans are special accounts designed to help you save for qualified educational expenses. You won’t pay taxes on interest earned in this type of account. 529 plans are state-sponsored, and rules vary by state.

Aside from saving your cash in a tax-advantaged savings account, you can also reduce the amount of taxes you’ll pay by lowering your taxable income. There are several different credits, deductions and strategies you can use to reduce your tax bill significantly.

How To File Taxes for Savings Accounts

When you’re ready to file your taxes, expect to receive a Form 1099-INT from your bank if you’ve earned $10 in interest or more on an account. If you have multiple savings accounts at different banks, each one will send you a Form 1099-INT showing how much interest you earned that year.

Typically, banks send Form 1099-INTs in January or February. Depending on how many different types of accounts you have with a bank, you might also receive a combined form. Even if you don’t receive a Form 1099-INT, you’re responsible for reporting your interest earnings in your taxes.

You’ll report savings account interest alongside the rest of your taxable income on Form 1040. For interest or dividends greater than $1,500, you’ll have to itemize income sources on Schedule B.

While a few dollars might seem insignificant, always report interest on your taxes. Banks notify the IRS of how much interest they pay out.

Bottom Line

Earning interest in a high-yield savings account is a good way to put your money to work, but it also comes with some responsibilities. Uncle Sam treats savings account interest as income, and he’ll expect a piece of the pie come tax season. Keep the tax implications of your savings in the back of your mind and utilize strategies for reducing your tax burden.