Many savings accounts, certificates of deposit and money market accounts have enjoyed sizable interest rate bumps in 2022 as the Federal Reserve edges the target federal funds range higher.
Around this time last year, the best high-yield savings accounts earned an average of about 0.5% to 1%. As 2022 comes to a close, you can find online banks offering savings accounts with APYs of 3% and higher.
As long as the Fed keeps raising rateshigh-yield savings account rates will keep inching higher.
But all that interest isn’t free money. You have to pay taxes on savings account earnings.
Here’s how it works.
Are Savings Accounts Taxable?
Interest earned on a savings account is considered taxable income by the Internal Revenue Service. That means you need to report it on your tax return.
This includes interest earned from:
If you earned $10 or more in interest from your savings account this year, you’ll receive tax form 1099-INT from your bank or credit union before Jan. 31.
How Is Interest Income From Savings Accounts Taxed?
Savings account interest is taxed at your marginal tax rate, also known as your earned income tax rate. This can range from 10% to 37%, depending on your tax bracket.
Here are the 2022 marginal tax rates (used when filing your taxes in 2023) for reference.
2022 Marginal Tax Rates
|Tax Bracket||Single Filer||Married Couple Filing Jointly|
|10%||Up to $10,275||Up to $20,550|
|12%||$10,275 to $41,775||$20,550 to $83,550|
|twenty two%||$41,775 to $89,075||$83,550 to $178,150|
|twenty four%||$89,075 to $170,050||$178,150 to $340,100|
|32%||$170,050 to $215,950||$340,100 to $431,900|
|35%||$215,950 to $539,900||$431,900 to $647,850|
|37%||Over $539,900||Over $647,850|
Your taxable income for the year determines your tax rate for interest income. So if you fall into the 22% tax bracket, all savings account interest gets taxed at 22%.
Interest earned in 2022 must be reported when you file your taxes in 2023.
A few things to keep in mind:
- The IRS taxes…