How Much Money Can You Have in Your Bank Account Without Being Taxed?

Learn how and when savings accounts are taxed

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Opening an interest-yielding savings account is a great way to build your nest egg while earning a bit extra along the way. However, you won’t get to keep all the interest you earn, because it is taxable.

Learn more about the tax on savings accounts and where else you might want to consider keeping your money.

Key Takeaways

  • The interest you earn from the money in a savings account is taxable.
  • The principal balance in your savings account is not taxable.
  • Your interest earnings are added to your total income, and both are taxed at the same marginal income tax rate.
  • You can reduce the taxes owed on interest from your savings account by using various tax-advantaged savings accounts.

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.

You are required to report any amount of interest you earn on your taxes, even if you don’t receive a form.

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 2021 tax year.

2021 Tax Brackets
2021 Tax Rate Single Filer Married Individuals Filing Joint Returns Head of Household
10% Up to $9,950 Up to $19,900 Up to $14,200
12% $9,951 to $40,525 $19,901 to $81,050 $14,201 to $54,200
22% $40,526 to $86,375 $81,051 to $172,750 $54,201 to $86,350
24% $86,376 to $164,925 $172,751 to $329,850 $86,351 to $164,900
32% $164,926 to $209,425 $329,851 to $418,850 $164,901 to $209,400
35% $209,426 to $523,600 $418,851 to $628,300 $209,401 to $523,600
37% $523,601 or more $628,301 or more $523,601 or more

For example, if you are a single filer and earned $50,000 through your wages and $200 through interest from a savings account in 2021, your total income would be $50,200. The first $9,950 would be taxed at the 10% rate, the next $30,574 would be taxed at the 12% rate, and the remaining $9,675 would be taxed at the 22% rate.

If your modified gross income is above a certain threshold (from $125,000 to $250,000 depending on your filing status), you could also owe the 3.8% Net Investment Income Tax (NIIT) on your interest earnings. The NIIT applies to a variety of investment income including interest, royalty income, rental income, capital gains, and more.

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.

It never hurts to double-check the earnings reported to ensure they match your records.

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, or for a first-time home purchase. 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.

There are annual limits on the amount you can deposit into a Roth IRA, and income limits that can reduce or eliminate your ability to contribute.

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.

Frequently Asked Questions (FAQs)

Why do I have to pay tax on interest earned in my savings account?

The IRS considers most interest that you receive from your financial accounts as earnings, and therefore taxes it as part of your earned income. While certain types of interest are tax-exempt, such as interest earned from some government bonds, interest on money in a savings account is eligible to be taxed.

How much interest on savings is tax-free?

All of the interest you make from a savings account is taxable, from as little as one cent up to a million dollars. You are required to report any amount you make on your tax return for the year you received it.

In what year did the U.S. start taxing interest from savings accounts?

The law that counts interest received from financial accounts, bonds, a promissory note, etc. as gross income, making it fully taxable, went into effect November 26, 1960.

Article Sources

  1. IRS. “Topic No. 403 Interest Received.”

  2. IRS. “26 CFR 601.602: Tax Forms and Instructions,” Pages 5-7.

  3. IRS. “Basics of the Net Investment Income Tax.”

  4. IRS. “Frequently Asked Questions: 1099 INT Interest Income.”

  5. Healthcare.gov. “Health Savings Account (HSA).”

  6. U.S. Department of the Treasury. “​​Summary of Key Roth IRA Features.”

  7. U.S. Securities and Exchange Commission. “Investor Bulletin: An Introduction to 529 Plans.”

  8. Cornell Law School. “26 CFR § 1.61-7 - Interest.”