Savings accounts at banks and other financial institutions offer a way to earn a return on income without buying assets that might fall in value. Unlike investments that need to be sold to realize gains, savings accounts pay interest periodically over time. In general, interest earned on savings accounts is considered taxable income, even if you do not withdraw the interest.
Interest income is taxable on a savings account and any other interest-bearing account such as a certificate of deposit, checking account or money market account. According to the Internal Revenue Service, any interest you receive, or that is credited to an account and is available for withdrawal, is taxable in the year you receive it. This money is included in your annual income when you file your taxes, making the tax rate on interest equal to your normal income tax rate.
When you earn interest on a savings account or similar account, the payer of the interest should provide you with a Form 1099-INT if you receive more than $10. This form documents the amount of interest paid, allowing you to report it on your tax return. Certain types of interest may be reported on forms 1065, 1120S and 1099-OID.
Dividends are periodic payments that some businesses and mutual fund companies make to shareholders based on company performance. Dividends are a form of taxable income, but they are not considered interest income for tax purposes. Certain types of income payments that may be referred to as "dividends" are actually interest income. These payments include distributions received from credit unions, cooperative banks, mutual banks, and domestic savings and loan associations.
Money you save in a tax-advantaged retirement account such as a 401(k) plan or traditional individual retirement account grows tax-deferred until withdrawal. This means you don't pay taxes on capital gains, dividends or interest earned until you take the money out during retirement. With a Roth IRA, your contributions are not tax-deductible. However, you don't have to pay taxes on interest or investment gains upon withdrawal.