Do you owe taxes on your savings account interest?

Putting cash into a savings account can be an excellent way to save for a rainy day while keeping your money accessible and safe. But with any interest you earn on those savings, you'll need to keep potential taxes in mind.

In a low interest rate environment, the interest you earn on a savings account may not catch your attention—but there still could be tax implications. And when interest rates are higher and you're earning more, it's definitely essential to understand how the tax on savings account interest works to ensure you're taking advantage of returns while complying with IRS rules.

Interest earned on a savings account is subject to federal—and often state—income tax. This is true whether the account is an ordinary savings account, a high-yield savings account, an interest-bearing checking account, a money market account or something similar.

The federal government taxes interest earned on these accounts at your ordinary income tax rate, meaning the amount you pay depends on your tax bracket.

For example, if you're in the 24% tax bracket, you'll pay roughly a 24% tax on any interest income you earn. You'll pay a higher tax rate on your interest income if you're in a higher tax bracket.

People who fall above certain income thresholds also pay the net investment income tax (NIIT) on their investment income. NIIT applies to interest from a savings account, dividends, capital gains, royalties and income from rental properties. If you're subject to NIIT, you'll pay an additional 3.8% tax on your investment income.

The NIIT applies to married couples filing jointly with $250,000 or more in modified adjusted gross income (MAGI), or single filers with a MAGI of $200,000 or more.

The bank or financial institution where you hold your savings account will send you a Form 1099-INT if the interest you earned during the year totaled $10 or more. Form 1099-INT reports your interest income to both you and the IRS, and you must report this income on your tax return.

It's important to note that if you earned less than $10 in interest on all accounts with that financial institution, you may not receive a 1099-INT. However, the interest income is still taxable.

You'll have to take responsibility for finding the amount of income you earned during the year rather than relying on the tax form. Fortunately, this is usually easily found by looking at your December 31 account statement or logging into your account online.

With the tax on your interest income in mind, you can look for ways to work tax efficiency into your financial strategy. If you can anticipate and budget for those taxes—and explore ways to spread your tax liability over time and account types—it can ease that yearly tax hit.

To further consider income tax diversification, you could discuss tax-free or tax-deferred investment alternatives with your financial advisor:

• Invest in municipal bonds. Interest earned on municipal bonds is free from federal income taxes, as well as from taxes within the issuing state.

• Keep more of your money in tax-sheltered accounts. Tax-sheltered investment accounts, such as 401(k)s and IRAs, provide opportunities to grow your nest egg in a tax-deferred way. You don't have to pay taxes on the account earnings until you begin taking withdrawals in retirement. If you choose a Roth IRA, you may be able to avoid paying taxes on your withdrawals entirely.

• Take advantage of a Health Savings Account (HSA). If you have a high-deductible health plan (HDHP), save for out-of-pocket medical expenses like doctor visits and prescription medications in an HSA. These accounts allow you to make tax-free contributions, grow your funds tax-free and make tax-free withdrawals, as long as you use the money to pay for qualified medical expenses.

Of course, these strategies involve moving money from highly liquid saving accounts to less accessible investments or account types. You probably will want to keep your emergency fund or cash you're saving for a short-term goal in a savings account. Just remember, there are more tax-advantaged options if you don't need the money right away.

As you make these choices, it can help to speak with a local Thrivent financial advisor. Although it's easy to stash money away in a savings account, sit back and watch it grow, it's important to consider how these taxes could impact your financial strategy and how far your money can travel.