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Taxes on savings accounts are unfair. To illustrate what I mean, let’s say a young family of four lives in a two-bedroom apartment that they have outgrown. Both adults have decent jobs and are pulling in $80,000 between the two of them. They decide that they want to start saving for a home of their own where their kids can grow up. They know that it will take a couple of years before they have enough for the down payment. They smartly put their money into a high-yield savings account, earning 2% interest, this helps them earn a little extra income while not risking their investment in the stock market. Their goal is to save up for a 20% down payment. After three years of saving every extra penny, they have $50,000 in the account.
Because their savings are in a high-yield savings account with 2% interest, they earn $1,000 a year. Unfortunately, inflation for the last few years has been averaging 2.5%. Inflation is the average increase in the cost of goods over the past year. To illustrate inflation, assume the same home that they could have purchased for $250,000 last year now will cost them $256,250. Sadly, the family is also losing money because they will have to pay tax on the $1,000 of interest they earned from their savings. Taxation on interest income is the same as the couple’s income tax level, which in 2019, is 22% for a couple earning $80,000…
