How Is a Savings Account Taxed?

If you have money in a traditional savings account, any interest earned is considered taxable income by the Internal Revenue Service (IRS) and must be reported on your tax return. Taxable income includes interest earned on traditional savings accounts as well as high-yield savings accounts (HYSA), certificates of deposits (CDs), and money market deposit accounts.

What's Taxable and Why

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

When the bank pays interest into your account during the tax year, you will owe taxes on the interest.

Your bank or other financial institution will send you tax form 1099-INT early in the new year 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 your earned income tax rate for the year. As of the 2022 tax year, those rates ranged from 10% to 37%.

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.

What's Exempt From Tax

The earned interest on savings accounts is taxed, but you do not have to pay taxes on the full balance in your account. That money is your savings; you presumably already paid income taxes before depositing it in your account.

If your savings account has $10,000 and earns 0.2% interest, you are only taxed on the $20 interest the bank pays you. You are not taxed on the $10,000 (or principal amount).

Exceptions to Taxes on Interest

Certain types of accounts, such as traditional and Roth individual retirement accounts (IRAs), allow the interest on savings to accrue tax-deferred. You don't have to report the earnings on the account as taxable income from year to year. The taxes are deferred until after you retire.

In a traditional IRA or 401(k) account, you don't owe taxes on your account or its earnings while accumulating the money. You owe income taxes on both when you withdraw the money, presumably after you retire.

With a Roth IRA, you've already paid income taxes on the money you deposit each year. You don't owe taxes on the principal or any earnings, as long as you wait to withdraw the money until after age 59½.

How to File

Early each year, the bank that holds your savings account sends you a form 1099-INT, showing interest earned in the previous year. Sometimes, it may come as part of a larger statement from a broker. That is the amount you report as taxable income on the account.

The Bottom Line

You must pay taxes on interest payments you received in your high-yield savings account or other savings account—even if it didn't add up to much. Taxes can add to inflation's bite on any returns you earn in your savings account. Consider comparing savings account interest rates to find higher-yield accounts to make what you can.