Money that you keep in a savings account is not taxable, but the interest you earn on your savings account typically is, unless the savings account is titled in the name of an IRA or other tax-deferred retirement account. How much you will pay will depend on your income and tax status, which will determine your marginal tax rate.

Paying taxes on savings account interest
All interest that you earn on a savings or checking account is taxable as ordinary income, making it equivalent to money that you earn working at your day job. Thus, the tax rate can be as low as 10% to as high as 39.6% for high-income earners in the 2016 tax year.

By law, all interest earned on a savings account is taxable, even if it is just a few dollars per year. Financial institutions are required to send you a form known as a 1099-INT for interest earned during the year if you have earned more than $10 in interest during the tax year. If you earned less than $10 in interest from any one account, you may not receive a 1099-INT, but you are still required to report the interest to the IRS and pay any taxes due on it.

Calculating the amount of taxes due on savings account interest
One way to calculate the amount of taxes that you have to pay on a savings account is to find your marginal tax bracket, or the bracket in which your last dollar of taxable income falls.

The table below shows tax brackets for the tax year 2016. These tax brackets change each year as they are adjusted higher for inflation. However, for illustration purposes, the tax brackets for any year will work fine for example purposes.

Rate

Single

Married Filing Jointly

Head of Household

10%

$0 to $9,275

$0 to $18,550

$0 to $13,250

15%

$9,275 to $37,650

$18,550 to $75,300

$13,250 to $50,400

25%

$37,650 to $91,150

$75,300 to $151,900

$50,400 to $130,150

28%

$91,150 to $190,150

$151,900 to $231,450

$130,150 to $210,800

33%

$191,50 to $413,350

$231,450 to $413,350

$210,800 to $413,350

35%

$413,350 to $415,050

$413,350 to $466,950

$413,350 to $441,00

39.6%

$415,050+

$466,950+

$441,000+

Let's suppose that you're a single person who had $50,000 in 2016 in taxable income excluding interest on savings accounts in 2016. If you were to break down your taxable income by tax bracket, you'd get the table below.

Tax rate

Income in This Bracket

Taxes Due

10%

$9,275

$927.50

15%

$28,375

$4,256.25

25%

$12,350

$3,087.50

Total

$50,000

$8,271.25

Your income fell into three different brackets, taxed at rates that varied from 10% to as high as 25%. All in all, you'll pay $8,271.25 in taxes on this $50,000 of taxable income.

Now, let's suppose that you also earned $100 in interest on your savings accounts for the year -- an impressive haul. Your tax liability table would change, with all of the $100 in incremental interest income falling in the highest 25% bracket, as shown in the table below.

Tax rate

Income in This Bracket

Taxes Due

10%

$9,275

$927.50

15%

$28,375

$4,256.25

25%

$12,450

$3,112.50

Total

$50,100

$8,296.25

Notice what happened. Your income went up $100, and all of it fell in the 25% tax bracket. Thus, your income taxes due increased by $25, to account for 25% taxes on $100 in interest on your savings account.

Taxes are complicated, varying from person to person, and situation to situation. However, a good way to estimate how savings account interest affect your tax burden is to do exactly what we just did: Find your marginal tax bracket, and multiply the tax rate for that bracket by the amount of interest earned on your savings during the year.

 

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