There are taxes on interest from my savings account? Really?! In a word…YES!
While putting money in what is traditionally called a “passbook” savings account is a good way to keep money safe and earning a competitive interest rate, many people think that they should not have to pay taxes on the interest earned on their savings. They reason, after all, that taxes have already been paid once on the money they put into the account. Why should they have to pay taxes on it again?
Actually, the taxes are not paid on the contributions to the savings account made by the owner, but only on the interest that is earned on the account. Before opening a savings account, you need to be aware of the tax consequences and how this can affect your tax situation.
The Internal Revenue Service considers interest earned on a savings as taxable income, which makes the earnings reportable on a 1099-INT form when you file your tax return. This form reports how much interest you earned during the previous year, and what you have to include when you file your taxes. If you earned a free gift or incentive amount on your savings account, the value of the gift or incentive amount paid on the account will also be included in what is reported on your 1099-INT.
If you have a small savings account with a small amount of interest earned, there is no need for additional tax planning. However, you will still receive a 1099-INT for the interest paid on the account which then is included on your tax return. Financial institutions are required to send you a form 1099-INT for interest earned if you have earned more than $10 during the year.
Advance tax planning definitely plays into the equation if you have a significant balance in your savings account, thus receiving hundreds of dollars in 1099-INT reportable interest. The bank does not withhold taxes on your interest earnings, but you do have to pay taxes on it. While planning for other areas of your overall tax situation, remember to include interest income received on your savings accounts as well if the reportable interest is significant.
One last thought about savings accounts that definitely needs pointing out – If you have savings within a tax-deferred account such as an IRA, taxes are not paid on the money that is earned. Tax-deferred accounts are not subject to taxes paid currently, but are taxed as the money is withdrawn. This also is critical in your overall tax and retirement planning.
First United Bank does offer IRA accounts, as well as other wealth management services. We can help you manage and monitor your investments, creating a strategy that aligns your retirement savings with your overall financial goals. If you have any questions, please contact us today.