Did you earn money with your savings? Here’s what you need to know.
- Savings accounts pay you interest on the money you keep in the bank.
- You’ll need to know how much interest you’ve earned for tax purposes, and there’s usually an easy way to find out.
It’s a good idea to set aside money for emergencies – enough to cover three to six months of bills. And a savings account is the perfect place for your emergency fund.
Likewise, you may be saving for certain goals, whether it’s buying a house, starting a business, or taking your dream vacation. A savings account is also a good place to put money for these goals.
The benefit of keeping your money in a savings account is that you’ll earn interest on your deposits and won’t risk losing any of your principal in the same way as when investing in a brokerage account. But you might be wondering if savings account interest is taxable, and you might not like the answer.
The IRS gets a piece of everything
Any income you earn is money the IRS likes to tax you on. In the same way that you must pay taxes on the income you earn from your work (whether it is a full-time job or a side business), you must also pay taxes on your income. of interests.
As if that weren’t enough, interest income is taxed as ordinary income, meaning it’s taxed at the same rate as your regular salary. Certain types of income are taxed at a lower rate – for example, qualified dividends you might receive if you own shares that pay dividends.
Declare your interest income
If you earn more than $10 in interest from a particular bank, that bank is required to provide you with a tax form summarizing your interest payments for the year. The form is called 1099-INT, and you will either receive it by mail or have access to it when you log into your account.
But even if you don’t get a 1099-INT, you’re still required to report and pay taxes on your interest income, even if it’s a small amount. In this case, you will need to log into your account and add up your interest payments. Your bank can summarize this activity for you somewhere, but if it doesn’t, you’ll have to go through your statements month by month to get that total.
If you’re thinking “Wow, that’s a lot of work for a small amount of money”, then you’re right. The reality is that if you earned less than $10 in interest, you’re probably thinking of putting an extra $2 or $3 in the pocket of the IRS, if that’s the case. But unfortunately, it is an obligation for which you are still responsible.
What about other paid accounts?
You may decide to keep your money in a certificate of deposit to earn a higher interest rate than a regular savings account pays. This interest is also considered income and must be reported to the IRS.
Additionally, if you have a checking account that pays interest, you will also need to report this to the IRS. In the end, interest is interest no matter what account it comes from, and the IRS inevitably wants its cut.
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