If you have money in a traditional savings account, chances are that you're not earning significant money in interest. 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. This 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.
  • 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 taxed at the marginal rate.

What's Taxable and Why

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

Your bank or other financial institution will send you tax form 1099-INT 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 the marginal rate. In other words, if your income tax bracket is 35%, the interest on your savings account is taxed at that rate too.

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

Though the earned interest on savings accounts is taxed, you do not have to pay taxes on the account's full balance. If your savings account has $10,000 and earns 0.2% interest, you are only taxed on the $20 in interest the bank pays you, not on the principal that drove those earnings.

Certain types of accounts, such as individual retirement accounts (IRAs), allow interest on savings to accrue tax-deferred, and those earnings do not need to be reported. In a traditional IRA, you pay taxes on your earnings when you withdraw money. With a Roth IRA, you don't even pay taxes on qualified distributions, as long as you have reached age 59½.

How to File

Early each year, the financial institution 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 form must be sent to the IRS when you file your tax return. 

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.