Calculate Your Real Interest Rate
When you see FNBO Direct offering 3.25% APY for your savings, you might be tempted into thinking that you will get to keep the entire 3.25% APY for yourself. However, just like your job, you don’t because Uncle Sam will want to get his piece of the pie. Savings account interest is reported on a 1099-INT form and treated more like ordinary income and less like dividend interest. In other words, it’s taxed at your income tax bracket, rather than at the more favorable 0%/10%/15% long term capital gains rate that dividends enjoy.
How do you figure your actual, take home interest rate? Simply subtract out your taxes! If you are in the 25% tax bracket, take 25% away from the 3.25% (multiply it by 0.75), and you’ll see that you get to keep 2.4375% of the original 3.25%.
This shouldn’t really affect your thinking though, as all bank interest is treated the same so you’re comparing apples to apples on this one. It’s just important to always consider taxes whenever you talk money… the government will always to remember to collect its due.