With a few exceptions, the interest earned on savings accounts is taxable, both to the Federal and State governments. If the savings account is a tax deferred IRA (Individual Retirement Account), the interest income earned will not be taxed by Federal or State governments until withdrawal of the funds, and the account owner is over the age of 59 years and 6 months. If funds are taken out of an IRA savings account early, the savings account owner will be charged a financial penalty. There are three basic tax brackets for regular interest bearing savings accounts: (1) $0 to $10; (2) $10.01 to $1500; and (3) from $1500.01 upwards. The Internal Revenue Service (IRS) defines each of these brackets online at www.irs.gov/taxtopics.
Banking institutes will issue an IRS tax form 1099-INT to both the savings account owner and the federal government. It is not necessary to attach the 1099-INT form, but the information must be reported and must match the information transmitted to the IRS. As in all cases when someone has various forms of reportable income, it is advisable to seek the guidance and assistance of a good tax professional.
<strong>$0 to $10 of Interest Income:</strong>
There are no federal or state taxes due when the total earned interest on all savings accounts is $10 or less. However, the interest income does have to be reported on all tax returns.
<strong>$10.01 to $1500 of Interest Income:</strong>
If the total of interest income received and recorded on all IRS forms 1099-INT is between $10.01 and $1500, the number must be listed as Taxable Interest on all tax returns, whether the taxpayer is using a long 1040 form or the shortened 1040-EZ form. There is no requirement to attach the 1099-INT forms, but the total number listed on a person’s tax returns must match the amount of earned interest income reported to the IRS by the banking institutions.
<strong>Over $1500 of Interest Income:</strong>
When the total amount of interest income earned on savings accounts is $1500.01 or higher, the total amount must be listed as Taxable Interest on all tax return forms. In addition to listing the interest earned on the tax return forms, the owner of the savings accounts must fill out and attach an IRS Schedule B. The Schedule B must contain the individual amounts received and the names of each financial institution that issued an IRS form 1099-INT.