Taxes on Savings Account Interest
| 2022 Tax Brackets | |||
|---|---|---|---|
| 2022 Tax Rate | Single Filer | Married Singles Filing Joint Returns | Head of Household |
| 10% | Up to $10,275 | Up to $20,550 | Up to $14,650 |
| 12% | $10,275 to $41,775 | $20,551 to $83,550 | $14,651 to $55,900 |
| 22% | $41,776 to $89,075 | $83,551 to $178,150 | $55,901 to $89,050 |
| 24% | $89,076 to $170,050 | $178,151 to $340,100 | $89,051 to $170,050 |
| 32% | $170,051 to $215,950 | $340,101 to $431,900 | $170,051 to $215,950 |
| 35% | $215,951 to $539,900 | $431,901 to $647,850 | $215,951 to $539,900 |
| 37% | $539,901 or more | $647,851 or more | $539,901 or more |
For example, if you are a single filer and earned $50,000 through your wages and $275 through interest from a savings account in 2022, your total income would be $50,275. The first $10,275 would be taxed at the 10% rate, the next $31,500 would be taxed at the 12% rate, and the remaining $8,500 would be taxed at the 22% rate.
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If your modified gross income is above a certain threshold (from $125,000 to $250,000 depending on your filing status), you could also owe the 3.8% Net Investment Income Tax (NIIT) on your interest earnings. The NIIT applies to a variety of investment income including interest, royalty income, rental income, capital gains, and more.
How to Track and Report Your Interest for Taxes
You can track the amount of interest you earn from your savings account throughout the year in a spreadsheet or by using accounting software. However, if you earn more than $10, you will receive a 1099-INT at the end of the year showing how much you’ve earned. In fact, you may receive a 1099-INT and a 1042-S on any interest-bearing account regardless of the amount of interest earned.
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It never hurts to double-check the reported earnings to ensure they match your records.
If you’ve earned less than $1,500 in interest income for a tax year, you’ll report it on your 1040 tax return form. If you’ve earned $1,500 or more, you’ll need to report the income on Schedule B (1040 form), Interest and Ordinary Dividends, and will need to attach it to your return.
How to Reduce Tax Obligations on Your Savings
If you’d like to minimize your tax obligations on an interest-yielding savings account, you can opt to diversify your money across other tax-advantaged savings accounts. Here are a few examples.
Health Savings Accounts (HSA)
HSAs are savings accounts for people with High-Deductible Health Plans (HDHP). They enable you to put away pre-tax earnings that can be used to pay for qualifying medical expenses. Qualifying medical expenses include copayments, coinsurance, deductibles, and more, but do not include premiums.
If you have an HDHP, you can deposit up to the yearly limit into an HSA and won’t pay taxes on it. For 2022, the limits are up to $3,650 for individual coverage and $7,300 for family coverage. If you qualify for an HSA, you could save more on taxes than you would earn on interest for funds that you end up spending on qualified medical expenses.
Roth Individual Retirement Account (Roth IRA)
A Roth IRA is a retirement account in which you can deposit money that has already been taxed. The money in the account will grow each year, and you won’t have to pay taxes on the growth. When you withdraw your contributions, they will not be taxed. Further, if you withdraw earnings, they will not be taxed as long as they are qualified.
Earnings are considered qualified if they are made at least five years from the date of your first contribution and if they are distributed after you are age 59½. You may also cash out with no tax penalties if you are disabled, or when the money goes to a beneficiary after your disability or death.
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There are annual limits on the amount you can deposit into a Roth IRA, and income limits that can reduce or eliminate your ability to contribute.
529 Plans
529 plans are designed to help you save for future education costs. Similar to a Roth IRA, you invest after-tax dollars into the account and they grow over time. If you withdraw the funds and use them to pay for qualified higher-education expenses, you won’t pay taxes on the earnings.
Qualified higher-education expenses include fees, tuition, and room and board at any college or university. The funds can also be used to pay up to $10,000 in tuition per year, per beneficiary at elementary or secondary schools, whether public, private, or religious.
Diversifying Your Accounts
While an interest-yielding savings account is a good place to start your savings strategy, you can maximize your returns by utilizing a variety of accounts that meet different needs. For example, you could keep your emergency fund in your savings account while putting money into an HSA for medical expenses. You then could put a portion of money into a 529 plan to save for your children’s future education expenses and another portion into a Roth IRA to save for your retirement.
The right mix of accounts will depend on your individual situation and needs. Consult a tax professional to help you determine what works best for you.
Frequently Asked Questions (FAQs)
Why do I have to pay tax on interest earned in my savings account?
The IRS considers most interest that you receive from your financial accounts as earnings, and therefore taxes it as part of your earned income. While certain types of interest are tax-exempt, such as interest earned from some government bonds, interest on money in a savings account is eligible to be taxed.
How much interest on savings is tax-free?
All of the interest you make from a savings account is taxable, from as little as one cent up to a million dollars. You are required to report any amount you make on your tax return for the year you received it.
In what year did the US start taxing interest from savings accounts?
The law that counts interest received from financial accounts, bonds, a promissory note, etc. as gross income, making it fully taxable, went into effect November 26, 1960.