How much are you taxed on interest income?
Understanding how much you are taxed on interest income is crucial for anyone who earns money from savings accounts, certificates of deposit (CDs), or other interest-bearing investments. The tax rate on interest income can vary depending on several factors, including your filing status, income level, and the type of investment. In this article, we will explore the different tax rates and how they apply to your interest income.
Standard Tax Rates on Interest Income
Interest income is typically taxed at the same rate as your ordinary income. For the 2021 tax year, the standard tax rates range from 10% to 37%, depending on your taxable income. Here’s a breakdown of the rates:
– 10% for income up to $9,950 for single filers and $19,900 for married filing jointly.
– 12% for income between $9,951 and $40,525 for single filers and $41,775 to $83,350 for married filing jointly.
– 22% for income between $40,526 and $86,375 for single filers and $83,351 to $164,625 for married filing jointly.
– 24% for income between $86,376 and $164,925 for single filers and $164,926 to $329,850 for married filing jointly.
– 32% for income between $164,926 and $209,425 for single filers and $209,426 to $418,850 for married filing jointly.
– 35% for income between $209,426 and $523,600 for single filers and $418,851 to $628,300 for married filing jointly.
– 37% for income over $523,600 for single filers and over $628,300 for married filing jointly.
Adjustments for Tax-Exempt Interest
If you have tax-exempt interest, such as interest from municipal bonds, it is not subject to federal income tax. However, it may still be subject to state and local taxes, depending on where you live. Tax-exempt interest is reported on Form 1099-INT, but it does not affect your taxable income or your tax rate.
Reporting Interest Income
Interest income is reported on Schedule B of your Form 1040 tax return. If you receive interest income from multiple sources, you will need to report each source separately. The total interest income you report will be used to determine your taxable interest income and the appropriate tax rate.
Impact of Tax-Deferred Accounts
Interest earned on money in tax-deferred accounts, such as IRAs or 401(k)s, is not taxed until you withdraw the funds. This means that the interest income is not included in your taxable income until you make a withdrawal. When you do withdraw funds, the interest income will be taxed at your ordinary income tax rate.
Conclusion
Understanding how much you are taxed on interest income is essential for managing your finances and tax obligations. By knowing the standard tax rates, the impact of tax-exempt interest, and how to report your income, you can ensure that you are paying the correct amount of tax on your interest earnings. Always consult with a tax professional for personalized advice on your specific tax situation.
