You are required to pay taxes on the interest earned on a savings account but not on the principal amount you deposit. A bank will issue a 1099-INT form to calculate and submit any interest earned over $10 to the IRS. You can also opt to save your money in other types of accounts, such as a Roth IRA or 529 plan, that don’t require you to pay taxes on the interest.
Savings accounts are a reliable way to squirrel away money for the future and ideally reach your targeted savings goals. When you put money into your savings account, it is “after-tax,” meaning you have already paid tax on the income you are saving. And then, hopefully, you will earn a little interest on that money over time. So do you owe taxes on this interest, and what forms do you have to fill out to pay it? Additionally, if you want to save money for goals like retirement or your children’s education with a minimal tax burden, what other kinds of savings accounts might meet your needs? Let’s look at your savings options and tax obligations.
Savings account taxation 101
What you owe depends on your income and the amount of interest you earn.
What will I pay tax on?
The first order of business is to be crystal clear that the money you put into your savings account is not taxed as long as you have already paid taxes on it. For example, if you earned $100,000 and saved $50,000 of it after tax, the IRS deems that $50,000 to be nontaxable. However, the interest you earn on the $50,000 will be taxed. The IRS almost always taxes any money earned on other money unless you are using a specific tax-exempt vehicle, such as a 529 plan.
How does the IRS calculate the taxes?
With traditional savings accounts or their cousins — such as money market accounts — the IRS bases the APY, or annual percentage yield, on your income tax rate and corresponding bracket. In short, how much you earn on a yearly basis will determine how much tax you owe.
We will base our examples on the following IRS income thresholds for single filers using the rates of 2022.
|Tax rate||Income bracket|
|10%||$0 to $10,275|
|12%||$10,276 to $41,775|
|22%||$41,776 to $89,075|
|24%||$89,076 to $170,050|
|32%||$170,051 to $215,950|
|35%||$215,951 to $539,900|
|37%||$539,901 or more|
Savings interest: $1,000
Effective tax rate: 24%
Taxes due on interest: $240
Savings interest: $8
Effective tax rate: 24%
Taxes due on interest: $0 (no taxes on interest earned below $10)
Ready to open a savings account and start planning for your future goals? Check out these savings account options.
NIIT for high earners
NIIT stands for net income investment tax. This tax is levied on individuals making over $200,000 a year for a single filer and $250,000 a year for joint filers (as of 2022). The assumption is that people who are comfortably in the top 10% of income earners in the United States can shoulder the extra NIIT tax, which is 3.8%. Here is an example.
Savings interest: $10,000
Effective tax rate: 35%
Total due on interest: $3,880 (38.8% total)
How to file taxes on savings interest above the threshold
Your bank keeps track of the interest they paid you on your savings account. If you earn over $10 in interest per year, then they will provide you with an IRS form 1099-INT. This form will help you calculate how much tax you need to pay and how to report savings account interest so you can incorporate it into your overall tax return.
Fill out the form regardless
Even if it feels like a small amount if you earn more than $10 in interest, make sure you fill out this form correctly. You don’t want to give the IRS any reason to wonder what else you aren’t filling out and send an audit your way.
How to avoid paying tax on savings earnings and interest income
On traditional savings, money market accounts, or even CDs, you most definitely need to pay tax if the interest is over $10. However, the IRS realizes that there are certain savings objectives that are so crucial U.S. citizens deserve a tax break. Here are some of the current savings vehicles that can help mitigate taxes while saving.
Roth accounts: IRA/401k
Roth accounts are special savings accounts where you can save money while not paying any taxes on the interest earned. Not only do these accounts let you earn interest and appreciation tax-free, but the withdrawals are free as well. (That is, as long as you’ve met the minimum five-year holding period and you withdraw after age 59.5). Again, the key here is after-tax income; the savings you contribute to a Roth IRA savings account or Roth 401k savings account must already have been taxed.
As college tuition is incredibly expensive and only seems to be increasing, a 529 plan lets you save for qualified education purposes. These 529 plans behave like Roth retirement plans in that you must contribute the money with after-tax dollars. However, the money can grow and earn interest tax-free. Typically, 529 plans are used to save for college expenses. But they can be used for K-12 (think private school for your kids or grandkids) and vocational training schools as well. As long as the fund is used for what the IRS deems as “qualified education expenses,” 529s can grow/earn interest tax-free and be withdrawn tax-free.
Municipal bonds can be a great way to earn interest on your savings without being taxed on a federal level, as well as help out your community. For instance, if your county wants to build a complex with public sporting facilities, such as pickleball courts, they might offer municipal bonds for this purpose. The bonds will pay you interest, just like a savings account, and tend to be safe investments, as they are often backed by taxes or other revenues.
How do you avoid tax on a savings account?
Firstly, your principal is never considered taxable income. You only pay taxes on the interest earned. On a traditional savings account, you will be charged federal income tax on any amount over $10.
How much money can you have in your savings account without paying taxes?
Tax is not correlated to the amount of money in your account but rather the money you make in interest. As long as you make less than $10, you pay no tax.
Do I have to pay taxes on my checking account?
If you have a high-yield checking account or another account, such as a money market account, you still have to pay taxes to the IRS if the interest earned is over $10.
Does savings count as income?
The amount you saved would have been taxed as income beforehand, but once you save it, it is not taxed. Only the interest or growth you earn from savings is taxed if it is above the $10 threshold.
How is savings account interest taxed?
For anyone who makes under $200,000 per year as a single filer or $250,000 as joint filers (as of 2022), interest derived from a savings account will be taxed like ordinary income. If you earn more than that, you will need to pay an additional net investment income tax.
- You do not have to pay tax on the money you have deposited into your savings account. Instead, you need to pay tax on interest derived from your savings account that exceeds $10.
- Interest on your savings account is taxed as ordinary income tax. If you make over a certain amount, will have to pay an additional NIIT (3.8% for 2022).
- There are options for other types of savings accounts that don’t incur tax as long as they are for special purposes, such as retirement or education.