Do I Have To Pay Taxes on My Savings Account?

One question that comes up each year around tax time is do I have to pay taxes on my savings account, and if so, how does it all work?

Every year, on April 15th, Americans all across the country file their tax returns, knowing what to include and not include in your filing is of paramount importance.

After all, omitting certain information can end up costing you quite a bit of money.

When it comes to personal finance, understanding the intricacies of your income tax return is very important.

Failing to declare certain income can see you receive fines and interest that you will need to pay to the IRS on top of the sum initially owed.

This article will be looking at how taxes on savings account work and which system applies to most interest-bearing deposit accounts.

We will be looking at how different types of income are assessed and the general procedure for filing taxes.

We will also be looking at steps you can take to lowering your tax bill, from stashing savings in tax-advantaged accounts to tax-free investments.

What Money in Your Savings Account is Taxable?

Essentially, there are two monies on which you have to pay taxes regarding savings accounts – interest earned and any bonuses that you might have received with the account.

However, there are some caveats.

Before we go any further, it is worth noting that taxable savings accounts are taxable on all other interest-bearing accounts.

While traditionally, only savings accounts earned interest to remain competitive and grow their customer base, banks have started to offer interest on different types of accounts. Keep in mind that this may also qualify as taxable interest.

One prime example of this is interest-bearing checking accounts, which are still offered by several financial institutions while not the norm.


Any interest income earned from your bank or credit union savings accounts, including income earned from a high-yield savings account, within the tax year is taxable and payable.

One rule worth noting here is that you need to have earned $10 or more from a given financial institution before any tax is due.

What you’ll need to do here is to add up all of the interest earned on your deposit accounts, excluding any tax-deferred accounts. The total amount of interest earned is the taxable amount.

Once you hit the $10 threshold, the bank will send you a special form called Form 1099-INT, which you should receive towards the end of January (IRS will also receive a copy).

If you haven’t received the form, you still need to declare interest earned. Not having received the form does not preclude you from paying taxes.

Since banks do not withhold tax when paying out interest, the onus is ultimately on you. If you haven’t received the form yet or have misplaced it, you might want to get in touch with your bank to see if they can send you a copy.

What Qualifies as Interest?

That’s an excellent question that requires further investigation since it’s not only interest that qualifies, as tax is concerned.

Asking this question is especially important if your savings account is with a credit union.

To this end, the following qualifies as a taxable interest in the eyes of the IRS:

The following also qualifies as taxable interest:

  • Interest earned on corporate bonds
  • Dividends paid on deposited insurance
  • Dividends and interest earned from bonds
  • Dividends and interest earned from bills and notes
  • Any interest earned from a business that’s at least $600

How much interest you make will also impact the procedure you must follow when filing your tax returns.

As a rule of thumb, if the total interest earned surpasses the $1,500 mark, you will need to fill in a specific tax form (Schedule B), along with the standard tax form (Form 1040).

If you fill in a Schedule B form, you will need to list all of your accounts individually and how much tax you’ve earned from each.

Once you have done this, sum up the interest of each account, then follow the provided instructions to carry forward the total interest to the main tax form – Form 1040.


Interest is not the only way to make money from your bank accounts. Bonuses (like sign-up bonuses or referral bonuses) offered by financial institutions can provide account holders with a nice boost.

Like interest earned on deposits, bonuses are taxable, with no distinction made between interest and any bonuses earned as far as tax is concerned.

Any bonuses earned will also show up in Form 1099-INT, mentioned above. If they go over the $10 threshold mark, the payable tax gets added to your tax bill.

The important thing here is to plan. If you are opening a new account to get a lucrative bonus, it might be wise to set the tax amount aside not to feel an extra pinch when paying your taxes.

The same goes for any interest earned, especially if the resulting tax bill is likely to be on the hefty side.

How Are Savings Accounts Taxed?

Not all income is taxed the same way – in fact, two different categories differentiate how income is taxed.

The first category is referred to as earned income, while the second category is unearned income.

Earned Income

Earned income (also known as ordinary income), for the most part, includes any income derived from work. Such incomes include:

  • Salaries and wages
  • Tips and bonuses
  • Self-employment earnings
  • Benefits
  • Long-term disability benefits
  • Deferred compensation plan payments

Earned income, that is to say, income that falls within the above list incurs three specific types of taxes. These taxes all go towards different things and include:

  1. Payroll tax / FICA / OASDI (including Social Security contributions and Medicare contributions)
  2. Federal income tax
  3. State income tax

These taxes are typically taken off your paycheck by your employer and make up the difference between gross income and net income.

Unearned Income

On the other hand, unearned income is money you don’t earn through work, like:

  • Dividends and interest
  • Pensions
  • Property rental income
  • Alimony payments
  • Investments capital gains

On the other hand, unearned income does not incur the payroll tax. Instead, any income derived from this category is included in your AGI (Adjusted Gross Income) and taxed at your marginal tax rate.

There are, however, some exceptions, like qualified dividends and capital gains, which are taxed at a lower rate.

The important thing here is to understand which tax bracket you fall under and then make sure that you deduct the right amounts.

Keep in mind that when taxpayers overpay, the IRS will return the excess amount. You might also want to use tax software or the services of a financial advisor if you’re unsure or get stuck when filling out the relevant forms.

Why Are Savings Accounts Taxed?

In the eyes of the IRS, income is income and, as such, is subject to taxation. As we saw earlier, different rules apply to different types of income.

While there are some distinctions, thresholds, and exceptions, all income generated must be declared and any applicable tax paid.

Tax-Free Savings Accounts and Investment Opportunities

There are several tax-free savings accounts and investment opportunities that allow you to save money on your tax bill.

Be aware, however, that these accounts are designed for specific reasons and serve a different purpose than traditional savings accounts.

While saving money is something that most of us are always going to welcome, do not rush your decisions.

Locking your money in an account can lead to early withdrawals that will typically carry fines. Doing so can lead to even higher expenses, and you will spend the money you save on taxes on fines and fees.

Individual Retirement Accounts (IRAs)

One type of these accounts is called IRAs, which stands for Individual Retirement Accounts. These accounts, as the name implies, allow you to save money for retirement.

Because they serve a particular purpose, there are several restrictions in place that may or may not make them a viable option for you.

It’s also important to note that IRA accounts come in many different flavors. You can choose from the many variations available depending on your situation and goals.

It is also worth noting that IRAs can hold a wide range of assets. While you can deposit your savings into an IRA, you can also deposit other financial assets, including stocks, ETFs, bonds, and others.

If you are an individual taxpayer, you can choose between a Traditional IRA and a Roth IRA. On the other hand, if you’re self-employed or a small business owner, you can choose between a SEP IRA and a SIMPLE IRA.

All of these IRAs are there to help you save for your retirement plan. There are other things to take into account, including your income and any existing retirement plans. These can not only affect which type of IRA account you can open but also whether tax is deductible or not.

The purpose of IRAs is to help you with your retirement savings, but they do have certain restrictions. For example, an early withdrawal (defined as any withdrawal before you hit the age of 59.5 years) will mean that a tax penalty becomes due, usually around 10%.


Annuities are a form of insurance for retirement, with payments made into your annuity being tax-deferred.

Through this scheme, tax only becomes payable upon disbursement or withdrawal. As such, they are not tax-free.

Even so, they can help you avoid tax payments now while making sure you have a large enough savings pot for your retirement.

Health Savings Accounts (HSAs)

If you have a qualifying health plan such as HDHPs (High-Deductible Health Plans), you take out an HSA (Health Savings Account).

You can make pre-tax contributions to your HSA, which in itself is a tax-advantaged account.

Funds in your HSA are for covering qualifying medical expenses (like medical, vision, and dental care). Since CARES (Coronavirus Aid Relief and Economic Security) came into law, you can use funds from HSAs to pay for several over-the-counter medicinal products.

Depending on your plan, you’ll also find yearly contribution limits. Contributions can typically be made by yourself or your employer.


Think of bonds as mini-loans an investor gives to an entity such as governmental agencies and private companies. Bonds are a type of debt security issued to find projects.

Municipal bonds are a type of bond that the government uses to fund projects within a state, municipality, or county. They are also known as munis for short, and some of them are tax-free.

Even so, there are several considerations that you need to take into account since, in some situations, tax may be due even on municipal bonds.

Savings bonds, like municipal bonds, are another type of bond. Interest earned on these bonds is subject to federal income tax, but there is no local tax or state tax. As such, these bonds can help you lower your tax bill, even if not avoid it altogether.

Bonds are a financial instrument that can be pretty complex at times. The important thing here is to do your homework, so you do not end up miscalculating incomes and taxes. They can also help you diversify your portfolio.

Mutual Funds

Think of mutual funds as a kind of portfolio of different securities. Instead of building your portfolio of different shares, you can buy into a mutual fund and take advantage of the built-in diversification that it enjoys.

Doing so can be a good risk management strategy, especially if you are new to investing.

As a shareholder of the mutual fund, you make money through distributions. Distributions are payouts made by the company managing the fund and consist of capital gains and other earnings.

Of course, they will also take a cut of the money as their management fee.

When it comes to capital gains, there are two flavors – long-term and short-term.

To optimize taxes, focus on long-term capital gains since these are taxed at the capital gains tax rate. This rate is typically lower than ordinary tax rates, leaving you with a lower bill to pay.

Taxes on My Savings Account: FAQs

How can I avoid paying taxes on my savings account?

You can avoid paying taxes by investing in a tax-advantaged account such as an IRA (Individual Retirement Account) or an HSA (Health Savings Account).

Keep in mind that both accounts serve a particular purpose, and you should spend any money for that purpose.

Alternatively, you can put your savings in certain bonds or mutual funds. While these might not necessarily be tax-free, they do enjoy lower tax rates, leaving you with more money in your account to save for the future.

Plan your finances with proper due diligence and avoid short-term savings at the expense of long-term gains.

How much savings can you have before you get taxed?

You get taxed depending on your interest rate and how much interest you make over a given tax year.

The applicable threshold is $10, which means that you need to earn at least $10 in interest from anyone financial institution before you become liable to pay tax on the amount earned.

So, Do I Have To Pay Taxes On My Savings Account?

Savers who put money aside in an interest-bearing savings account will need to pay taxes at the applicable income tax rate on any interest earned.

If your account came with a sign-up bonus or a referral bonus, money earned through any such promotion is also taxable.

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