by Matt Frankel, CFP | April 24, 2019
The short answer is no -- savings account interest is not tax-deductible. Savings account interest that is paid to you is generally considered to be taxable income and is taxed at the same rates as ordinary income.
However, like most topics having to do with taxes in the United States, there's a bit more to it than that. Here's a rundown of how savings account interest is taxed, an additional tax that applies to the savings account interest of high earners, the rules for reporting savings account interest on your tax return, and one big exception to the rule.
There's not a one-number answer to this question, as it depends on how much total taxable income you have for the year and your tax filing status.
This is because taxable interest is taxed according to the marginal tax brackets. For the 2018 tax year (the return you file in 2019), the marginal tax brackets are:
|Marginal Tax Rate||Single||Married Filing Jointly||Head of Household||Married Filing Separately|
|10%||$0 - $9,525||$0 - $19,050||$0 - $13,600||$0 - $9,525|
|12%||$9,525 - $38,700||$19,050 - $77,400||$13,600 - $51,800||$9,525 - $38,700|
|22%||$38,700 - $82,500||$77,400 - $165,000||$51,800 - $82,500||$38,700 - $82,500|
|24%||$82,500 - $157,500||$165,000 - $315,000||$82,500 - $157,500||$82,500 - $157,500|
|32%||$157,500 - $200,000||$315,000 - $400,000||$157,500 - $200,000||$157,500 - $200,000|
|35%||$200,000 - $500,000||$400,000 - $600,000||$200,000 - $500,000||$200,000 - $300,000|
|37%||Over $500,000||Over $600,000||Over $500,000||Over $600,000|
Data source: IRS.
For the 2019 tax year (the return you'll file in 2020), the tax brackets are changing slightly.
This chart may look complicated, but for the purposes of figuring out the tax on your savings account interest, it's actually quite simple.
Let's say that you're single and your taxable income for 2018 is $50,000 and that you earned $30 in interest from a savings account. For the "single" filing status, $50,000 in taxable income puts you in the 22% marginal tax bracket, and 22% of $30 translates to $6.60 in federal taxes on your savings account interest.
For tax purposes, interest income is considered to be a form of investment income. Although you may not think of a savings account as an investment vehicle, savings account interest is in the same broad category as capital gains, dividend income, and rental income, among other types.
That is important because there's an additional 3.8% "net investment income" tax that is applied to the investment income of certain high earners.
Specifically, here's the modified adjusted gross income (MAGI) thresholds for the net investment income tax by filing status:
|Tax filing status||Net investment income tax MAGI threshold|
|Married filing jointly||$250,000|
|Married filing separately||$125,000|
|Head of household||$200,000|
|Qualified widow(er) with dependent child||$250,000|
Data source: IRS.
The net investment income tax is assessed on a taxpayer's MAGI in excess of the threshold or the entire investment income, whichever is less. Here are a couple of examples to clarify this:
Let's say that your MAGI for 2018 is $220,000 including your $10,000 of investment income, and that you file a joint return with your spouse. This is less than the MAGI threshold for your filing status, so you do not have to pay the net investment income tax.
On the other hand, let's say that your MAGI for 2018 is $260,000, which includes $30,000 of investment income, and that you file a joint return. Your MAGI in excess of the threshold is $10,000, which is less than your total investment income, so you'll only pay the net investment income tax on that amount.
Technically yes, although if your savings account paid you a couple dollars last year and you didn't report it as income, it's a pretty safe bet that the IRS isn't about to come knocking on your door to collect taxes on it.
While you are legally obligated to report all interest earned on a savings account, financial institutions are only required to send you a tax document (more on that in the next section) if the interest earned during the tax year was $10 or more.
To be clear, even if your savings account paid you $1 in interest last year, I strongly recommend you report it on your tax return as income.
Having said that, $10 is the threshold where your financial institution will report it to the IRS on your behalf, and if you don't report interest in this situation, it becomes far more likely that you'll receive a notice from the IRS for underpayment.
Shortly after the end of a tax year, financial institutions where you earned $10 or more in interest will send you a 1099-INT tax form.
On your tax return, there's a space (line 2b) on the Form 1040 to report any taxable interest you've earned through the year. If you use a tax preparation program such as TurboTax, you'll be prompted to enter your taxable interest and the software will calculate your total and enter it in the correct spot for you.
For the purposes of this tax discussion, the term "savings account" doesn't just include money held in a branch-based bank account. While this is one of the types of accounts that can bear taxable interest, it isn't the only one. In addition, these types of accounts can pay you interest, which is taxed in the same manner:
One big exception to the tax rules discussed here is the interest on savings accounts (or CDs, money market accounts, etc.) that are held in an individual retirement account, or IRA. These are tax-deferred accounts, which means that tax on investment income earned in IRAs is not taxed on an annual basis. Money in a traditional IRA is only taxed when it is withdrawn from the account, while qualifying Roth IRA withdrawals are 100% tax-free.
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