Learn more about the tax on savings accounts and where else you might want to consider keeping your money.
How Your Savings Accounts Are Taxed
While the IRS doesn’t tax the money you have in a savings account, it does tax any interest you earn on that money. Tax is owed on interest in the year it becomes available to you. For example, if you have a balance of $20,000 in a Marcus by Goldman Sachs savings account with a 0.50% APY, and you are paid $100 over a year’s time in interest yields, you would owe taxes on the $100. Once you’ve received at least $10 in interest from a financial institution, it will report the payments to the IRS on Form 1099-INT. You’ll receive a copy of this form, which you’ll have to report on the designated spot on your tax return.
Does Your Balance Matter?
When it comes to the amount of taxes you owe due to your savings account, your account balance will be a factor. Although it isn’t taxed directly, your balance does determine the amount of interest you earn. The higher your savings account balance, the more interest will accrue and the more tax you’ll have to pay.
Tax Rates on Interest From Savings
Savings account interest will be taxed at the same marginal income tax rate as the rest of your earned income. Here’s a look at the tax rates for the 2022 tax year.
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. 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.
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.
