The amount of taxes you pay on money in a savings account depends on two things. The first is how much interest you earn from the savings account. The second is what your tax bracket is. It is possible that you will not owe any tax on the interest you earn. You should receive a Form 1099 form sometime in January of each year for each savings account you have.
The interest earned is income. When completing your tax return you add your interest income in the income section of your 1040 tax return. You add it to your W2 income, business income and any other income you received. The tax you pay on the interest depends on your total income, your adjusted gross income and, ultimately, your taxable income.
If you use a standard deduction to determine your taxable income, you subtract your allowable standard deduction from your adjusted gross income. You then subtract your allowable exemption deduction to determine your taxable income. Your federal income tax is then determined using the appropriate chart or table. To determine how much the interest income from your savings account added to your income tax, you can subtract the interest income from your total income and calculate your tax. The difference between the two tax calculations is the amount of additional tax you paid because of the savings interest income.
If you itemize your deductions, the way to determine your additional tax burden from the interest income is the same as the standard deduction, except that you substitute your itemized deductions for your standard deduction. If your itemized deductions exceed your standard deduction you should use your itemized deductions to determine your tax liability.
Your actual cost is approximately equal to the interest income times your final tax bracket percentage. This should not deter you from keeping a reasonable amount of money in a savings account, however, so that it is readily available in an emergency.
Phil Altshuler has written award-winning ad copy and sales-training literature since 1965. He is an expert in conventional and sub-prime loans, bankruptcy, mortgage loan modifications and credit. Altshuler was a licensed mortgage broker in California and Arizona, as well as a licensed electrical contractor. He has a Bachelor of Science in electronic engineering from California Polytechnic State University.