Savings account interest usually gets taxed at ordinary income rates, but there are a few things you should know.
What’s the savings account tax rate?
For federal taxes, the savings account tax rate is easy. The interest you receive is added to your taxable income, and you pay taxes according to your tax bracket.
For state taxes, you usually pay tax on savings account interest to the state you live in. If you move to another state, it’s important to update your address with your bank as soon as you move to ensure correct tax reporting.
In most states, you may your regular income tax rate on savings account interest.
Some states exempt all or part of your savings account interest or investment income. These exemptions are mainly to help retirees, so there may be age requirements.
Other states, like New Hampshire, don’t tax your job income but do tax your savings account interest and investment income.
Related: If you’re not satisfied with your savings account interest rate, you may want to look at buying savings bonds through TreasuryDirect.
How do you report savings account interest?
Savings account interest goes on Schedule B of your Form 1040 federal tax return. Your state may have its own Schedule B or call the form something else, but it’s almost always part of your main state income tax return.
You should receive a Form 1099-INT for each bank that paid you $10 or more in interest during the year. You must report any amount of interest, even if you don’t get a 1099-INT, on your tax return unless you’re not required to file due to your total income.
There is no minimum amount to pay tax on a savings account unless 1) you’re below the standard deduction based on your total income or 2) your state exempts a certain amount of savings interest income for state tax purposes.
When do you pay savings account tax?
For most people, savings account tax is a rounding error on their tax return. It adds a few dollars to their tax due at filing time or subtracts a few dollars from their refund.
If you will owe the IRS more than $1,000 when you file, you may need to make quarterly tax payments. You’re supposed to pay taxes throughout the year, which is why jobs take out taxes. If you owe too much when you file, you could have to pay an estimated tax penalty.
States may also have estimated tax requirements. For example, Ohio usually requires estimated tax payments if you’ll owe $500 to Ohio.
Is there tax withholding on savings account interest?
Most banks don’t withhold taxes on savings account interest by default. That’s why you have to make estimated tax payments.
Some banks give you the option to have taxes withheld. Your withholding will be reported on your Form 1099-INT, and you’ll settle up at tax time just like you do with job tax withholding and your W-2.
If you’ve had trouble paying your taxes, the IRS or your state may require your bank to withhold taxes under the backup withholding rule.
What is an IRA savings account?
An IRA savings account is an account that works like a savings account but follows the IRA tax rules. Opening an IRA savings account is the same for taxes as opening an IRA investment account.
If you have an IRA savings account, you don’t pay taxes when you receive interest. You will usually owe taxes when you withdraw funds and may have to pay a penalty if you withdraw funds before retirement age.
Many banks offer Roth IRA options as well. Roth IRA savings accounts follow the usual Roth IRA rules where you deposit after-tax money and can withdraw money tax-free unless you make an unqualified early withdrawal.
Deposits to an IRA savings account count towards your IRA contribution limit for the year. If you want to contribute to both an IRA savings account and an investment account, you can, but your total contributions must be under the limit. You don’t get separate limits for different types of IRAs.
When do banks send out tax statements?
The usual deadline to get your 1099-INT is January 31st. If you haven’t received it by then, contact your bank or check your online account for a download.