Taxes on Savings Accounts: 2023 Marginal Tax Rates

• Taxpayers must pay taxes on the interest earned in most savings accounts, but not on the principal amount.
• Other interest-bearing accounts may also be subject to income tax.
• There are a handful of savings accounts that come with tax advantages.

There are several benefits to having a savings account: They’re stable, offer interest rates and are secured by the Federal Deposit Insurance Corporation (FDIC). However, there's a tax on savings account interest.

Will you have to pay taxes on your savings? The answer is yes — as long as your savings are earning interest.

Interest income is taxable by the Internal Revenue Service (IRS), which means you’ll want to make sure you file it on your tax return. There’s more to understand about taxes on savings accounts, however.

Are savings accounts taxed?

Taxpayers must pay taxes on the interest earned in their savings accounts, but not on the principal amount. Any interest earned is considered additional income for the year and taxed at the taxpayer’s regular income tax rate.

A traditional savings account isn’t the only type of account that offers interest income. Many types of savings accounts are interest bearing and taxable. Some checking accounts, certificates of deposit (CDs), money market accounts (MMAs) and high-yield savings accounts all face the same taxes as a regular savings account.

How are savings accounts taxed?

The interest you make on a savings account is considered earned income by the IRS. This means you’ll have to treat what you make in interest as taxable income when you calculate the amount of tax you’re responsible for within any given tax year.

The IRS taxes the annual percentage yield (APY) and any sign-on bonuses based on your marginal income tax rate, which is calculated based on ordinary income. Therefore, the amount of tax you’re responsible for changes with your tax bracket.

Here are the IRS marginal tax rates for tax year 2023 (due in 2024):

For example, someone taxed at the 12% marginal rate who made $200 in savings account interest would generally pay $24 of income tax on that gain. A person taxed at the 35% marginal rate, by comparison, would generally pay $70 in income tax for what their savings account accrued in interest.

Net investment income tax (NIIT)

Some people who are above a certain interest income threshold may be subject to an additional tax on the interest they earn on savings accounts. This is called the net investment income tax (NIIT).

NIIT is a 3.8% tax on capital gains, dividends and rental property income. This tax only applies to single filers making more than $200,000 and married couples making more than $250,000, as of the 2022 tax year.

How to report savings account interest when filing your tax return

Is it necessary to claim interest on a savings account? The answer is yes. Anyone who earns more than $10 in interest income over the year will receive a Form 1099-INT tax form from each bank or credit union where they have interest-bearing accounts.

This form helps determine how many tax dollars you'll need to pay and will be included in your tax return. Savings account interest counts as taxable interest, so taxpayers need to be sure that they include any amount of interest when filing — even if it’s below the $10 threshold for receiving a 1099-INT form.

How to minimize taxes on savings

One general tenet of personal finance planning is to maximize your tax-free earnings. Doing so with a savings account, however, can be a challenge.

There is no tax-free savings account specifically designed to help you minimize your interest income tax bill, but there are other ways to save money that may come with better tax advantages. There are a host of accounts that are either tax-advantaged or untaxed and can help you grow your nest egg.

Roth IRAs and Roth 401(k) plans

An individual retirement account (IRA) helps you save for retirement, and each type of IRA has different tax advantages. A Roth IRA uses post-tax income (e.g. your take-home pay) to invest in the markets.

Since you’ve already paid income tax on the money you contribute to a Roth IRA, there's no income tax due on withdrawals — provided you're over age 59 1/2 and the money has been in your account for a minimum of five years. However, you may need to pay penalties for early withdrawals in this retirement planning account unless they’re used for qualifying expenses. 

Traditional IRAs and 401(k) plans

Traditional IRAs and 401(k) plans take a different tax approach to growing your retirement savings. These two accounts use pre-tax income to fund retirement-driven investments, and you'll pay tax when you take distributions.

If you’re in a lower tax bracket during retirement, you may pay less in income tax than you would have when you made the initial deposits. You may also be subject to a penalty for early withdrawals from these accounts.

529 plans

If you’re looking to save specifically for education-related expenses, a 529 plan can be an excellent, tax-advantaged option. In general, 529 savings plans can grow like IRAs, except they offer tax-free withdrawals for qualifying educational expenses.

These typically include tuition at accredited colleges, universities and trade schools. They can also cover private secondary education tuition at qualifying schools. 

Some states offer tax deductions for 529 contributions to their own plans. Others even acknowledge several out-of-state 529 plans as eligible for state tax deductions. In most cases, you don't need to pay state income tax on interest earned, as long as the plan was bought from the state in which you claim residency.

Savings bonds

Interest on Series EE and Series I savings bonds are similar to 529 plans, as they’re not taxed when used for qualifying education expenses at eligible academic institutions. However, unless they're used specifically for that purpose, you will generally need to pay taxes at the state and/or federal level.

Municipal bonds

The interest earned on municipal bonds is generally exempt from federal income tax. In most cases, these bonds are also exempt from state income tax, depending on the bond’s terms and state laws, as long as you reside in that state.

Health savings accounts (HSAs)

Health savings accounts (HSAs) are another option to consider if you want to set aside pre-tax income to go toward healthcare costs. These accounts get funded from your paycheck, similarly to 401(k)s, or you can make contributions directly to an HSA provider if you are self-employed.

Distributions are also tax-free, as long as they’re used for approved medical expenses. You'll need to have a qualified high-deductible health plan to qualify for an HSA, among other requirements. 

Ready to save?

Financial health means setting aside savings — be it for retirement, an emergency fund or furthering your and your loved ones’ education or health. Some savings accounts come with required interest income taxes; others have more flexibility, including not paying tax on funds used in a specified way.

To learn which of these options works best for you, reach out to a financial professional for more specific advice. A professional can help you discover the best way to make the most of your savings.