If you have savings accounts in the good old U S of A, you already know that your interest rates haven’t exactly been stellar for a long time. What you may not know is that, if you want to be above board and legal (and we assume you do), you still have to pay income tax on the paltry interest that your money does manage to earn.
Now, if you only have a small savings account, you don’t really have much to worry about for a couple of reasons:
- The interest earned on small savings accounts doesn’t generally add up to enough to be taxable.
- Even if your interest is taxable, the amount of taxes you would need to make up on small savings accounts wouldn’t add up to much, if you did happen to get audited.
By small, we mean an account that earns less than $100 in interest in a given calendar year. If your account earns less than that, under current regulations, you can ignore the income from interest when you are filling out your tax forms. If you earn more than $100, of course, you will need to claim the interest earned as income and pay taxes on it.
Assuming you have a reasonably average interest rate of about 0.5%, this means that you won’t need to worry about paying taxes on your interest unless you have $20,000 or more in the bank. Of course, interest rates vary widely, so your best bet in determining the amount of interest you have earned is to check your statement at the end of the year.
We don’t know about you, but we figure it’s a bit of a travesty that you should be taxed on money when you’ve done the responsible thing and saved it. After all, you were already taxed on this money when you earned it in the first place. Being taxed again on the interest your money earns in a savings account seems a bit like overkill.
Think about it. The economy leaves us little enough incentive to save money as it is, yet banks need those funds on deposit if they are going to continue to offer financial services. So, wouldn’t it make more sense to create a situation that doesn’t unduly punish people for leaving money in a savings account? When you think about it, taxing as much as 28% of your interest taxes an already pathetic 0.5% APY and reduces it to a net 0.36% APY, after taxes. That’s not exactly motivation to save. Fortunately, we have representative government here, so if enough people get upset enough, this taxation on savings accounts can be eliminated.