If you keep your salary in an interest-earning savings account does the gov't still get tax from it?

Question

I'm planning to save my salary proceeds in an interest-earning savings account but i'm worried the gov't will still get a chunk of it eventhough they already removed taxes from the salary. What about the interest? Is it taxable? How much? Thanks for your answer.

Answer 1

The interest on the account will be taxable. Think about putting some in an IRA where tax on the earnings is deferred.

Answer 2

Interest-earning savings accounts are not worth the effort because they are not even keeping up with inflation now. CDs are an improvement, but not much of one. The only taxable part is the interest because you have already paid the taxes on the principal, I hope.

If you are saving this for retirement, put as much as you can in a Roth IRA. Roth IRA's are funded from taxed income and the entire amount withdrawn after you reach the proper age is tax-exempt, both principal and earnings. They let you make money and keep it all.

Answer 3

The interest is certainly taxable and must be reported. If FIT, FICA, and state taxes have already been paid and you are depositing the net proceeds, government will not tax you since you have already been taxed.

You will only be taxed when you file your return if you have underpaid your FIT and SIT for the year.

The problem with depositing your earnings in an IRA: You can only place up to $4,000 per year and there is a penalty on depositing too much (6% for as long as the excess remains in the account). Also you may not withdraw that money until you are at least 59 1/2, otherwise you pay ordinary income taxes on your withdrawal PLUS a 10% penalty for early withdrawal. This means if you want to use your earnings to get gas and pay groceries and write a rent check, you may not do so until you are 59 1/2.

Also, an IRA is really a savings plan where you can defer part of your salary (up to $4,000 per year) to after retirement, when your tax rate is likely to be LOWER. IRA's are funded with PRE-TAX dollars, which means you have not paid taxes on the funds you are investing into your IRA. Deductions you make into IRA are SUBTRACTED FROM YOUR TAXABLE INCOME, and you do not pay taxes on these investments until you withdraw them starting at age 59 1/2.

The wages you receive are AFTER-TAX dollars, which means you have already paid taxes on your wages. Your best bet is to invest those funds (since you have already paid taxes on them) in a brokerage account or variable annuity, or a Roth IRA (but Roth IRAs also have limitations) where you can invest the money and ONLY THE GROWTH is taxed.

See if your employer has a 401(k) program. You can invest up to 15% of your earnings each year (or up to $44,000 per year, whichever is lower) into a 401(k). This lowers your taxable income each year and your tax liability. If you are stuck on the IRA, then set one up at a local financial institution or investment adviser's office and ask your payroll department to send part of your wages ($166.66) every pay period to your IRA account to lower your taxable wages while saving for your retirement.

Answer 4

The amount withheld from your salary for tax might or might not be enough, so you'll still have to file a tax return and calculate what your tax is on it - if too much was withheld, you'll get the extra refunded - if not enough was withheld, you'll pay the difference.

Any interest on the account must be claimed as taxable income on your tax return. It's not possible to say how much the tax will be, since that depends on your income and personal situation.

Answer 5

yep