Do You Pay Taxes on a Savings Account?

Do you pay taxes on a savings account? Savings accounts are a popular way for individuals to store their money securely while earning interest. But just like other forms of income, the interest earned from these accounts is usually subject to taxation in the U.S. Knowing how your savings account interest is taxed can help you stay compliant with IRS regulations and avoid penalties.

How Savings Accounts Are Taxed

When you deposit money in a savings account, your bank or financial institution pays you interest, typically as a percentage of the amount saved. This interest is classified as income by the IRS and is subject to federal income tax and, in some cases, state income tax, too. Here are a few important points to consider about the taxable nature of savings account interest:

• Ordinary income: Interest earned on savings accounts is treated as ordinary income. This means it is taxed at your normal income tax rate, not at the lower rates that apply to capital gains or qualified dividends.
• Interest threshold for tax reporting: While all interest earned is technically taxable, banks are only required to report it to the IRS if it totals $10 or more over the year.^[1] However, you are still responsible for reporting and paying taxes on any interest earned, regardless of whether you receive a tax form from your bank.
• Joint accounts and tax obligations: For joint savings accounts, the person who provides their Social Security number to the bank is typically responsible for reporting the interest income. If both account holders are responsible for filing taxes, they may need to coordinate on how to report the income.

How To Report Savings Account Interest

Reporting savings account interest to the IRS is straightforward, but it’s essential to get it right to avoid potential complications. Here’s how to handle the process:

• Form 1040: If you’re filing a standard tax return using Form 1040, you’ll report your savings account interest on line 2b, which is designated for "taxable interest." Be sure to include the total amount of interest from all savings accounts.
• Additional schedules: If your total taxable interest from all sources exceeds $1,500, you’ll need to complete and attach Schedule B to your tax return. This schedule allows you to break down the sources of your interest income and helps the IRS verify the total amount.^[2]
• Reporting under $10: Even if you earned less than $10 in interest and didn’t receive a 1099-INT, you’re still required to report it. While the IRS might not pursue such small amounts aggressively, it’s best to be thorough and avoid any potential issues.

IRS Form 1099-INT Overview

Form 1099-INT is a tax document provided by banks and other financial institutions that have paid you interest during the year. It is crucial for accurate tax filing and is typically sent to you by January 31 of the following tax year. Here’s a quick overview of what to expect on a 1099-INT form:

• Box 1: The main box you’ll see on a 1099-INT form is "Interest Income," which lists the total interest earned from that particular institution. This is the amount you report as income on your tax return.
• Box 2 and beyond: For some people, other boxes may also be relevant. For instance, Box 2 shows any early withdrawal penalty, Box 3 shows interest on U.S. savings bonds, and Box 8 provides information on tax-exempt interest, which may not be relevant for most savings accounts but is important for certain types of bonds.
• Cross-checking with IRS records: Your bank also sends a copy of the 1099-INT to the IRS. This means if you don’t report the interest, or if there is a discrepancy, the IRS will likely identify the issue, and you may receive a notice to amend your return or pay additional taxes.

What Is Not Taxed on a Savings Account?

While interest on savings accounts is taxable, other aspects of savings accounts are not. Here are a few types of earnings and scenarios where you wouldn’t owe taxes:

1. Principal deposits and withdrawals: The money you deposit into your savings account, known as the principal, is not considered taxable income.^[1]
2. Certain tax-advantaged accounts: If you have a savings account within a tax-advantaged structure, such as an HSA or Roth IRA, the interest you earn may be tax-free.^[3] It’s important to know which types of accounts are eligible for tax-free growth to avoid unnecessary taxation on interest.

Avoid Common Mistakes in Reporting Savings Account Interest

While reporting interest on savings accounts is relatively simple, there are a few common pitfalls and mistakes to avoid to help ensure smooth tax filing and avoid potential penalties.

Common Tax Filing Mistakes

When filing taxes, it's essential to report all interest earned, even small amounts under $10, to avoid discrepancies. Be sure to include interest from every savings account, not just your primary one, as leaving any out can lead to incomplete filings. Additionally, if your total interest income exceeds $1,500, remember to file Schedule B, as the IRS requires it for higher amounts, and omitting it may cause delays.^[2]

Penalties for Incorrect Reporting

The IRS imposes penalties for failing to report income, including savings account interest. If you don’t file your tax return, you could face a monthly penalty of 5% of unpaid taxes, up to 25%. If you file but don’t pay the full amount, there’s an additional 0.5% penalty per month.^[4] Underreporting income may result in a 20% penalty on the understated tax, and any unpaid tax accrues interest, further increasing what you owe over time.^[5]

Keeping Tax on Savings Accounts Simple

Paying taxes on savings account interest is a straightforward process, but it’s essential to understand how it works to avoid mistakes. By knowing what is and isn’t taxed, as well as the steps to report your interest income accurately, you can simplify your tax filing and avoid unnecessary penalties. Always check your 1099-INT forms and ensure that all savings accounts are included to stay compliant with IRS requirements.