## TAXATION OF EARNED INTEREST

While determining what interest is taxable and what interest isn’t taxable can be a fairly sophisticated task, figuring out the tax on taxable interest is very straightforward. Let’s say that your taxable income is $50,000 not counting interest. Your tax is approximately $6,700, which is an average tax rate of 13% and an incremental tax rate of 15%. If you have $10,000 of savings earning 4% interest, you earned $400 in interest last year. This interest is taxed at the 15% rate, so the tax on your interest is 0.15(400) = $60.

If your interest was $400 but you had to send $60 back to the government, then you only got to keep $400 – $60 = $340. Your effective interest rate was therefore

$340 $10,000 = 3.4%.

If your taxable income, not counting interest, had been $360,000, your tax would...

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