Do I Have to Pay Taxes on My Interest from My Savings Account?

August 22, 2013

The short answer is yes.

Intuitively, many people think that they shouldn’t have to pay taxes on the interest they earn for their savings. It is their savings after all, from money they already paid taxes on once, so why should they have to pay a tax again?

People who wonder this are right: they shouldn’t have to pay taxes on their savings.

By putting your money in a savings account, it gives the bank an opportunity to take that money and give out a loan. This loan is used to build a house or buy a car or start a business. In return for the bank loaning your money to this homebuyer or car shopper or business owner, the bank pays you interest.

But it raises the question: if we shouldn’t have to pay taxes on the money we earn from our savings accounts, why should we have to pay taxes on the money we earn from other financial investments?

Again, the answer is we shouldn’t.

Generally when the government taxes something you get less of it. I don’t know how true this holds for savings accounts, but it certainly holds true for other types of savings.

Stocks, corporate bonds, and treasury bonds are common types of investment that nearly everyone takes part in (either directly, through personally managed day trading or retirement accounts, or indirectly, through penchant funds, etc.).

The investment in these stocks serve as a loan to businesses (stocks or corporate bonds) or to the government (federal, state, and local). They help the businesses and the government make investments, pay bills, or grow (preferably this only applies to the businesses).

For bonds, in return for you investing/loaning your money to these companies or the government, you receive an occasional yield or payment.

For stocks, if the company wisely invests the money (i.e. the capital) that you provide, the value of their stock goes up. If you decide to sell when the stock goes up, you receive a profit on your investment. This is called a capital gain.

Under the current tax code, your interests on all your different types of loans and investments are taxed.

This takes money out your pocket, which hurts your prosperity today. As unfortunate as less money today might be, it has even has worse long-term implications.

Savings and investment drive long-term economic growth, so when tax policy discourages savings and investment, it discourages long-term economic growth and prosperity.

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