If you have money in a traditional savings account, chances are you're not earning significant money in interest given today's low rates. But any interest earned on a savings account is considered taxable income by the Internal Revenue Service (IRS) and must be reported on your tax return.

That includes interest earned on traditional savings accounts as well as high-yield savings accounts, certificates of deposits (CDs), and money market deposit accounts.

Key Takeaways

  • Any interest earned on a savings account is taxable income.
  • Your bank will send you a 1099-INT form for any interest earned over $10, but you should report any interest earned (even if it's less than $10).
  • Interest from a savings account is considered an addition to your taxable income for the year in which it is paid.

What's Taxable and Why

Savings accounts are not generally thought of as investments. However, they do earn money in the form of interest, and the IRS considers the interest on them to be taxable income, whether or not you keep the money in the account, transfer it to another account, or withdraw it.

That is, when the bank pays interest into your account, you will owe taxes for that year on the interest.

Your bank or other financial institution will send you tax form 1099-INT early in the new year for any interest earned on the account if the earnings are more than $10. However, whether or not you receive a 1099-INT, you must report all interest income, even if it's just a few dollars.

Interest from a savings account is taxed at your earned income tax rate for the year. In other words, it's an addition to your earnings and is taxed as such. As of the 2020 tax year, those rates ranged from 10% to 37%.

If your net investment income (NII) or modified adjusted gross income (MAGI) is over a certain threshold, interest income is also subject to another tax called the net investment income tax.

If you received a cash bonus for signing up for your savings account, you'll owe income tax on that amount. Your bank will report it on your 1099-INT form.

What's Exempt From Tax

The earned interest on savings accounts is taxed, but you do not have to pay taxes on the full balance in your account. That money is your savings, and you presumably already paid income taxes on it before depositing it in your account.

If your savings account has $10,000 and earns 0.2% interest, you are only taxed on the $20 in interest that the bank pays you, not on the principal amount that earned that interest.

Exceptions to Taxes on Interest

Certain types of accounts, such as traditional and Roth individual retirement accounts (IRAs), allow the interest on savings to accrue tax-deferred. That is, you don't have to report the earnings on the account as taxable income from year to year. The taxes are deferred until after you retire.

In a traditional IRA or 401(k) account, you don't owe taxes on your account or its earnings while you're accumulating the money. You owe income taxes on both when you withdraw the money, presumably after you retire.

With a Roth IRA, you pay income taxes on the money you deposit each year. You don't owe taxes on the principal or the earnings when you withdraw the money after age 59½.

How to File

Early each year, the bank that holds your savings account sends you a form 1099-INT, showing interest earned in the previous year. In some cases, it may come as part of a larger statement from a broker. That is the amount you report as taxable income on the account.

Advisor Insight

Rebecca Dawson
Silber Bennett Financial, Los Angeles, CA

The financial institution that holds your savings account mails a form 1099-INT, showing interest earned in the previous year, in late January, if you earned more than $10 in interest in the account. However, the IRS requires you to report all taxable interest in your income. If you accepted a cash incentive from the bank to open a new savings account, that bonus is also taxable and needs to be reported as well. If your taxes are not paid on the interest earned in your savings account, the IRS will enforce penalties and fees.

These rules only apply to traditional or online savings accounts. They are not to be confused with savings held in an IRA. The interest on those is tax-deferred; you pay taxes on it only when the funds are withdrawn.