How is a savings account taxed?
In the United States, the Internal Revenue Service considers interest earned in a savings account to be taxable income. Taxpayers are required to submit a 1099-INT form to the IRS when they file their tax returns; this form details the amount of earned interest on accounts held during the prior year. Certain types of retirement accounts, such as individual retirement accounts, allow interest on savings to accrue tax-deferred.
More information on the taxation of interest received can be found in Topic 403 on IRS.gov. Backup withholding information is discussed in Topic 307.
Interest Earned Through Investments
Interest, once accrued in your savings account, is subject to taxation during the same year that you receive it. What happens to the money after you've received it is inconsequential; it will be taxed the same way regardless of whether you keep it, transfer it to a new account or spend it.
Tax Rate on Interest Income
Interest from a savings account is taxed at the marginal rate. In other words, if your regular income tax bracket places you in a 35% bracket, then the interest on your savings account is taxed at that rate.
Balance on the Savings Account
Though the earned interest on the savings account is taxed, you will not have to pay taxes on the account's balance. If your savings account has $10,000 and earns 0.2% interest, you are only taxed on the extra $20 in interest that the bank credits to you.
The IRS sends out a form 1099-INT (interest earned form) for interest earned on a savings account. Keep in mind, you will not receive this form if you have not earned more than $10 worth of interest in the previous year on that savings account.
A savings account is taxed by the IRS on form 1099-INT. Your financial institution that holds your savings account mails these forms to their customers in late January for the previous year's interest. You are only taxed on any interest earned in the account over a minimum of $10, although the IRS requires you to report all taxable interest in your income.
Keep in mind that some banks offer cash incentives to open a new savings account, those bonuses are also taxable and need to be reported once a year as well.
This only applies to traditional savings account or an online savings account which would generate taxable interest income. Not to be confused with an IRA savings account which are tax deferred and you pay taxes when the funds are withdrawn. IRAs have contribution limits, but with a traditional savings account, there are no limitations on contributions.
If your taxes are not paid on the interest earned in your savings account, the IRS will enforce penalties and fees.
If you receive interest on the account, then you are required to report the interest and pay taxes. Interest is taxed at the same rate as your working income. The bank or credit union is only required to send you a 1099-INT if the interest for the year is $10 or more, yet you are required to report all interest earned on your tax returns.
Kimberly J Howard, CFP
Interest income earned in a savings account is taxable to you. That said, this amount is often de minimus unless you have a fairly large balance in the account. In other words, savings accounts pay basically 0% interest.
Adam C. Harding, CFP