It’s a good idea to set aside money for unexpected expenses — at least enough to cover three to six months’ worth of expenses. A savings account, on the other hand, is the best place to save your emergency fund.
Similarly, you may be in the process of putting money aside to achieve certain objectives, such as purchasing a home, starting a business, or going on a dream vacation, among others. A savings account is a fantastic location to put money down for those kinds of goals as well.
Keeping your money in a savings account has the advantage of earning interest on your deposits while also avoiding the chance of losing any of your capital, as is the case when investing in a brokerage account.
However, you may be wondering whether the interest earned on your savings account is taxable — and the answer may not be what you were hoping for.
The Internal Revenue Service (IRS) receives a portion of everything.
Any money you earn is money that the Internal Revenue Service (IRS) would like to tax you on. In the same way that you are obligated to pay taxes on the income you earn from your job (whether it is full-time employment or side hustle), you are also expected to pay taxes on the interest income you receive.
Not only that but interest income is taxed at the same rate as ordinary income, which means it is taxed at the same rate as your normal paycheck. Income from certain forms of investments is taxed at a lower rate than other sorts of income, such as qualifying dividends that you would receive if you hold dividend-paying stocks.
Keeping track of your interest income
A bank is required to present you with a tax form detailing your interest payments for the year if you earn more than $10 in interest from a particular bank in a given year. The form is called 1099-INT, and you’ll either receive it in the mail or have access to it when you check into your account to see what you’ve earned.
In any case, even if you do not receive a 1099-INT, you are still required to report and pay taxes on your interest income, regardless of how insignificant the amount is.
It will be necessary for you to enter into your account and total up your interest payments in that scenario. The overall amount of activity might be summarized elsewhere by your bank, but if not, you’ll have to read through your statements month by month to figure out how much money you’ve spent.
If you’re thinking to yourself, “Wow, that’s a lot of labor for a small amount of money,” you’re not alone in your thinking. The reality is that if you earned less than $10 in interest, you’re probably looking at another $2 or $3 in the IRS’s pocket, at the very most. Unfortunately, it’s a duty that you’re still responsible for fulfilling.
What about other types of accounts that pay interest?
You might prefer to store your money in a certificate of deposit in order to earn a higher interest rate than you would receive from a standard savings account. In addition, interest is considered income, and it must be reported to the Internal Revenue Service.
In addition, if you have a checking account that pays interest, you’ll be required to disclose it to the Internal Revenue Service (IRS). At the end of the day, interest is interest, regardless of where it originates, and the Internal Revenue Service (IRS) will inevitably want a piece of the action.