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By Maurie Backman, The Motley Fool
It's a good idea to sock money away for emergencies -- enough to cover three to six months of bills. And a savings account is the ideal place for your emergency fund.
Similarly, you may be in the process of saving up for certain goals, whether it's buying a home, starting a business, or taking your dream vacation. A savings account is a good place to put money for those objectives, too.
The benefit of keeping your money in a savings account is that you'll earn interest on your deposits, and you won't risk losing any of your principal the same way you do when you invest in a brokerage account. But you may be wondering whether savings account interest is taxable - and you may not like the answer.
The IRS gets a piece of everything
Any income you earn is money the IRS likes to tax you on. Similar to how you're required to pay taxes on the income you earn from your job (whether it's a full-time job or a side hustle), so too must you pay taxes on your interest income.
As if that weren't bad enough, interest income is taxed as ordinary income, which means it's taxed at the same rate as your regular paycheck. Some types of income are taxed at a lower rate -- for example, qualified dividends you might receive if you own dividend-paying stocks.
Reporting your interest income
If you earn more than $10 in interest from a given bank, then that bank is required to provide you with a tax form summarizing your interest payments for the year. The form is called 1099-INT, and you'll either receive it in the mail or get access to it when you log into your account.
But even if you don't get a 1099-INT, you're still required to report and pay taxes on your interest income, despite it being a small amount. In that case, you'll need to log into your account and add up your interest payments. Your bank might summarize that activity for you somewhere, but if not, you'll need to go through your statements month by month to get to that total.
If you're thinking "Wow, that's a lot of work for a tiny amount of money," then you're correct. The reality is that if you earned under $10 in interest, you're probably looking at putting another $2 or $3 into the IRS's pocket, if that. But unfortunately, it's an obligation you're still on the hook for.
What about other interest-paying accounts?
You may decide to keep your money in a certificate of deposit to snag a higher interest rate than what a regular savings account is paying. That interest is also considered income and must be reported to the IRS.
Read more: How to Get Triple Your Usual Tax Refund
Plus, if you have a checking account that pays interest, you'll need to report it to the IRS as well. At the end of the day, interest is interest, no matter what account it comes from, and the IRS inevitably wants its share.
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