Taxes on bank accounts are primarily levied on the interest earned throughout the year. Whether it's a savings account, high-yield savings account (HYSA), certificate of deposit (CD), or money market account, the interest accrued is considered taxable income.

Dear Lykkers! Understanding how taxes apply can help in better financial planning.

How Bank Account Interest Is Taxed

Interest as taxable income

Interest earned on bank accounts is classified as taxable income by tax authorities. This applies regardless of whether the money is kept in the account, transferred, or withdrawn.

Tax rates based on income bracket

The tax on interest income aligns with the individual's income tax rate. For the 2024 and 2025 tax years, these rates range from 10% to 37%, depending on the income bracket.

Tax Reporting for Interest Income

Form 1099-INT

Banks issue a Form 1099-INT early each year to account holders who earned more than $10 in interest during the prior tax year. However, even if the earned interest is below this threshold, it must still be reported as taxable income.

Net Investment Income Tax (NIIT)

If the net investment income (NII) or modified adjusted gross income (MAGI) exceeds a specific threshold, interest income may also be subject to an additional net investment income tax.

What Is Not Taxed

Principal amounts

The initial deposit in a savings account is not taxed, as the funds are typically post-tax income. For example, if $10,000 is deposited into a savings account earning 0.2% interest, only the $20 interest earned is taxable, not the principal.

Tax-advantaged accounts

Interest earned in certain accounts, such as traditional and Roth individual retirement accounts (IRAs), is tax-deferred. With traditional IRAs or 401(k) accounts, taxes are due only upon withdrawal. Roth IRAs, on the other hand, allow tax-free withdrawals of both the principal and earnings after age 59½.

How to Minimize Tax Burden on Interest

Use tax-advantaged accounts

Opting for accounts like Roth IRAs or Roth 401(k)s can reduce the tax burden, as interest income grows tax-free in these accounts.

Choose higher-yield options

Compare interest rates among banks to find high-yield savings accounts or CDs, ensuring the interest earned outweighs the taxes owed.

Common Questions About Bank Account Taxation

Is interest below $10 taxable?

Yes, all taxable and tax-exempt interest must be reported, even if the bank does not send a Form 1099-INT.

Can the IRS check bank accounts?

While the IRS can access bank account details, it typically does so only during audits. All interest income should be reported to ensure compliance.

Understanding how bank account interest is taxed ensures better financial management. Taxes are owed on all earned interest, even from high-yield accounts, but strategies like tax-advantaged accounts can reduce the burden. Comparing account options can also help maximize returns despite taxation.