Bank Interest and Income Tax Rates

This tax season, many conservative investors are reaping at least a small reward from low interest rates on CDs, money market accounts, and savings accounts:

With interest rates so low, the income tax on that interest income may be dramatically lower. For people who are in high tax brackets, the difference in tax because of low bank rates can be quite significant.

More generally, income taxes are something that every conservative investor must consider when choosing to invest in bank deposit accounts that pay interest, such as CDs and savings accounts.

The value of that interest income can, depending on your personal tax situation, be eaten into by high tax rates. Interest income, after all, is taxed at the ordinary income rate. There is no lower special tax rate as there currently is for dividends or capital gains income.

For taxpayers who report other income from wages, pensions, or social security, the tax on interest income can reach up to 45 percent between federal and state income taxes.

Painful!

Conservative investors will want to keep a sharp eye, too, on the possible increases in tax rates that may be just around the corner. The higher income tax rates of tomorrow may render the higher bank rates of tomorrow less satisfying (although still, in truth, much to be hoped for).