Is money market interest taxed as income?
The interest you earn on a high-yield savings account—or any other savings account, money market account or certificate of deposit, for that matter—is subject to state and federal income taxes. This means there's no hard-and-fast answer for what you'll pay on your earnings.
- Vanguard Tax-Exempt Bond ETF (VTEB)
- Fidelity Municipal Bond Index Fund (FMBIX)
- Schwab Tax-Free Bond Fund (SWNTX)
- Vanguard High-Yield Tax-Exempt Fund Investor Shares (VWAHX)
- iShares California Muni Bond ETF (CMF)
- iShares New York Muni Bond ETF (NYF)
- BlackRock Short Maturity Municipal Bond ETF (MEAR)
Most interest income is taxable as ordinary income on your federal tax return, and is therefore subject to ordinary income tax rates.
- Investing in a tax-deferred account such as a traditional individual retirement account or a 401(k).
- Stashing money in a tax-exempt account such as a Roth 401(k) or a Roth IRA.
It is exempt from state and local taxes, but not federal income taxes. Repurchase agreements, as investments held by SPAXX and FZSXX are not exempt from state and local taxes. Therefore, SPAXX and FZSXX and other money market funds are also not exempt from state and local taxes.
All interest income is taxable unless specifically excluded.
Indirectly losing money, however, is a downside of money market accounts. Indirect loss can occur if the interest rates tied to the account fall, thus diminishing the initial return value of your account.
While money market funds aren't ideal for long-term investing due to their low returns and lack of capital appreciation, they offer a stable, secure investment option for individuals looking to invest for the short term.
Income generated by a money market fund can be either taxable or tax-exempt, depending on the types of securities in which the fund invests.
Interest generated by a money market account is considered taxable interest income. Any year that interest is more than $10 you'll receive a 1099 INT interest income statement at year-end.
What if I have more than $1500 in taxable interest income?
Individuals who receive $1,500 or more in qualified interest or dividends during the tax year must complete the Schedule B tax schedule provided by the Internal Revenue Service (IRS) and attach it to their tax return.
Interest earned on certain U.S. savings bonds, such as Series EE and Series I bonds, is exempt from state and local income taxes. Government bonds such as Series HH bonds and Treasury Inflation-Protected Securities (TIPS) may also be tax-exempt. Interest earned on 529 plans is usually exempt from federal taxes.
The interest you earn in a money market account is taxable as regular income. Reporting money market interest on your federal tax return is simple: Grab your 1099-INT form(s) and your Form 1040 to get started.
The carried interest loophole allows private equity barons to claim large parts of their compensation for services as investment gains, which allows them to pay lower tax rates than middle class taxpayers pay on their wages and other compensation. The loophole exacerbates income and wealth inequality.
Any interest earned on a savings account is taxable income. Your bank will send you a 1099-INT form for any interest earned over $10. You must report any interest earned on a savings account, even if it's less than $10.
Although the fund seeks to preserve the value of your investment at $1.00 per share, it cannot guarantee it will do so. An investment in the fund is not a bank account and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.
FMOXX - Fidelity ® Tax-Exempt Money Market Fund | Fidelity Investments.
Like SPAXX, FDRXX is another U.S. government money market fund. For all intents and purposes, it is basically an older version of SPAXX. Their holdings are nearly identical and they have nearly the same yield and the same historical returns. FDRXX launched in 1979 and has a 7-day SEC yield of 5.02%.
The most common sources of tax-exempt interest come from municipal bonds or income-producing assets inside of Roth retirement accounts.
- Leverage tax-advantaged accounts. Tax-advantaged accounts like the Roth IRA can provide an avenue for tax-free growth on qualified withdrawals. ...
- Optimize tax deductions. ...
- Focus on strategic timing of withdrawals. ...
- Consider diversifying with tax-efficient investments.
How much money can you have in your bank account without being taxed?
There is no specific limit or threshold that would cause the IRS to tax it. That being said, ant cash deposits of $10,000 or more would be reported by the bank in a Currency Transaction Report (CTR) to FinCEN, an arm of the Treasury Department.
Key takeaways
They may come with the ability to pay bills, write checks and make debit card purchases. Disadvantages of money market accounts may include hefty minimum balance requirements and monthly fees — and you might be able to find better yields with other deposit accounts.
Certificates of deposit (CDs)
If you withdraw the money before the CD matures, expect to pay a penalty. Depending on the size of the CD, you can earn a higher APY than you would with a savings account or money market account.
Since money market accounts are insured by the FDIC or the NCUA, you cannot lose the money you contribute to the account—even in the event of a bank failure. You can, however, be subject to fees and penalties that reduce your earnings.
Income earned from money market fund interest is taxed as regular income, up to 37% depending on the investor's tax bracket. While some local and state taxes offer breaks on income earned from U.S. Treasury bonds, federal income tax still applies.
