Yes, you owe federal income tax on savings account interest, but the amount depends on how much interest you earned and your total income for the year
The interest your bank pays you counts as taxable income. The IRS treats it the same way it treats wages or other money you receive — you report it on your tax return and pay income tax on it at your ordinary tax rate. There is no threshold below which interest becomes tax-free; even $1 of interest is technically taxable, though in practice the IRS only requires you to report it if your total interest income crosses certain minimums.
Your bank will send you a Form 1099-INT each January if you earned $10 or more in interest during the previous year. This form lists the exact amount of interest paid to your account. You use this number when you file your tax return. If you earned less than $10, your bank may not send a form, but you still owe tax on that interest if you file a return.
Some states also tax savings account interest, though the rules vary. A few states exempt interest income entirely; others tax it at the same rate as federal income tax. Check your state's tax authority website to learn what applies where you live.
Key Takeaways
- Savings account interest is taxed as ordinary income at your federal tax rate, with no minimum threshold — even small amounts are technically taxable.
- Your bank sends you a Form 1099-INT in January if you earned $10 or more in interest the previous year, and you report that amount on your tax return.
- State income tax on savings interest varies by location; some states do not tax it, while others tax it at the same rate as federal income.
- The higher your interest earnings, the more tax you owe, because interest is added to your other income and taxed at your marginal rate.
How the IRS counts savings interest as income
When you earn interest, the bank is paying you money for letting them use your deposit. The IRS classifies this as unearned income — income you did not work for, but still received. It goes on your tax return in a section separate from wages, but it counts toward your total taxable income for the year.
If you earned $500 in interest and your salary was $50,000, your taxable income becomes $50,500. You then pay income tax on that full amount at your tax bracket. This means the interest does not get taxed at a flat rate — it gets taxed at whatever rate applies to your total income. For most people, this means the interest is taxed at their marginal rate, which is the highest tax bracket they fall into.
The only exception is if your total income is low enough that you do not have to file a tax return at all. The IRS sets a threshold each year below which filing is not required. For 2024, a single person under 65 with only unearned income does not have to file if their income was under $1,300. But if you have any wages, the threshold is higher. Check the IRS website for the current year's threshold that matches your situation.
When your bank sends Form 1099-INT and what it means
In late January or early February, your bank mails or emails you a Form 1099-INT if you earned $10 or more in interest during the previous calendar year. This form has boxes showing the interest paid to each account you hold at that bank. If you have accounts at multiple banks, you will receive a separate form from each one.
The form goes to you and also to the IRS, so the IRS already knows how much interest you earned before you file your return. This is why it is important to report the correct amount — the IRS matches what you report against what the bank reported. If the numbers do not match, you may receive a notice asking you to explain the difference.
Keep your 1099-INT forms until you file your return. You do not send them with your return, but you need them to fill in the interest income section of your tax form. If a bank fails to send you a form but you know you earned interest, you can contact the bank and request a copy, or you can report the interest based on your own records.
How much tax you actually owe on interest
The tax you owe depends on your tax bracket, which is determined by your total income. If you are in the 12% federal tax bracket and earned $200 in interest, you owe roughly $24 in federal tax on that interest (before any deductions or credits). If you are in the 22% bracket, the same $200 in interest costs you roughly $44.
This is why the amount of tax varies so much from person to person. Two people earning the same $200 in interest may owe very different amounts depending on their other income. A student with part-time wages and $200 in interest might owe less tax than a retiree with the same interest but higher total income.
You can estimate your tax liability using the IRS tax tables or a tax calculator, but the exact amount depends on your full tax situation — your filing status, whether you claim dependents, whether you have deductions, and whether you have other income or losses. If you are unsure, a tax professional can walk you through the calculation.
State taxes on savings interest vary by location
Nine states have no income tax at all: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, Wyoming, and New Hampshire (which taxes only interest and dividends, but many accounts are exempt). If you live in one of these states, you owe no state income tax on your savings interest.
Most other states tax interest income the same way the federal government does — as ordinary income at your state tax rate. A few states offer partial exemptions for interest earned by retirees or people over a certain age, but these rules are narrow and usually require you to meet specific conditions.
To find out what your state requires, search "[your state] income tax savings interest" or visit your state's department of revenue website. The rules can change, so checking directly is faster than relying on general information.
Reporting interest on your tax return
When you file your federal return, you report interest income on Schedule B (if you have more than $1,500 in interest or dividends) or directly on Form 1040 (if you have less). You list each source of interest — each bank account — and add up the total. That total goes into the income section of your return.
If you file electronically using tax software, the software will walk you through entering the interest amounts from your 1099-INT forms. If you file by hand, you write the amounts in the boxes provided on the form. Either way, the process is straightforward once you have the 1099-INT in front of you.
For state taxes, you typically report the same interest income on your state return. Some states have their own forms or schedules, but the amount you report is usually the same as what you reported to the federal government. Check your state's tax form instructions to confirm.
Strategies to reduce taxes on savings interest
You cannot avoid paying tax on interest you earn, but you can reduce the amount of interest you earn in the first place. High-yield savings accounts pay more interest than regular savings accounts, but that higher interest is still taxable. Some people keep money in regular savings accounts specifically to earn less interest and owe less tax, though this is usually not a smart trade-off unless you are in a very high tax bracket.
Another option is to hold money in a Roth IRA or other retirement account, where interest and investment gains grow tax-free. These accounts have contribution limits and withdrawal rules, so they are not right for all savings, but they can be useful for money you plan to keep long-term. A tax professional can help you figure out whether a retirement account makes sense for your situation.
If you have a very large amount of savings earning interest, you might also consider bonds or other investments that offer tax advantages, though these come with different risks and rules. For most people with ordinary savings accounts, the simplest approach is to report the interest and pay the tax owed.
Frequently Asked Questions
Do I have to report interest if I earned less than $10?
Your bank does not have to send you a Form 1099-INT if you earned less than $10, but you still owe tax on that interest if you file a return. If you earned $5 in interest and file a tax return, you should report it. The threshold is just when banks are required to send the form, not when interest becomes tax-free.
What if I earned interest at multiple banks?
You will receive a separate Form 1099-INT from each bank. Add up all the interest from all the forms and report the total on your tax return. The IRS receives copies of all the forms too, so they will know if you miss any.
Can I deduct savings account fees from the interest I report?
No. You report the full interest amount that the bank paid you. Fees are handled separately — some may be deductible as miscellaneous expenses, but the rules are strict and most people cannot deduct them. Report the interest as-is.
Do I owe tax on interest if I did not withdraw it?
Yes. The IRS taxes interest the moment it is credited to your account, whether you withdraw it or leave it there to earn more interest. You owe tax on the interest in the year it was earned, not in the year you withdraw it.
What if my bank made a mistake on the 1099-INT?
Contact the bank and ask them to issue a corrected form. They will send you a corrected 1099-INT and also send a corrected copy to the IRS. Use the corrected form when you file your return. If you already filed and the bank later corrects the amount, you may need to file an amended return.