Savings account interest counts as taxable income
Yes, you owe federal income tax on the interest your savings account earns. The IRS treats it as ordinary income, taxed at the same rate as your wages or salary. If your bank paid you $10 in interest over the year, that $10 is added to your total income for tax purposes.
Your bank reports this interest to both you and the IRS using a form called a 1099-INT. You receive it by January 31 each year. The amount on that form is what you report on your tax return, and it determines how much additional tax you owe — or whether it reduces a refund you would otherwise receive.
State and local income taxes also explore to savings interest in most places. A few states (like Florida, Texas, and Wyoming) have no state income tax at all, so residents there owe only federal tax. Most others tax it at their standard income tax rate.
Key Takeaways
- The IRS requires you to report all savings account interest as income on your federal tax return, no matter how small the amount.
- Your bank sends you a 1099-INT form by January 31 showing the interest paid; this is the figure you report to the IRS.
- The tax you owe depends on your total income for the year and your tax bracket, not on the interest amount alone.
- Most states tax savings interest at their regular income tax rate, but a handful of states have no income tax at all.
- High-yield savings accounts earn more interest, which means higher tax liability — a tradeoff to consider when choosing where to keep money.
How the 1099-INT form works
Your bank calculates the interest you earned during the calendar year and reports it on the 1099-INT by January 31. If you have multiple savings accounts at different banks, you will receive a separate 1099-INT from each one. If you have multiple accounts at the same bank, they may combine them into a single form or issue separate ones — this varies by bank.
You need this form to file your tax return accurately. The amount shown is what you enter on your return. If you received interest but did not receive a 1099-INT by early February, contact your bank to request it. If the bank issued one but the amount is wrong, ask the bank to issue a corrected form (called a 1099-INT correction).
The 1099-INT also goes directly to the IRS, so the IRS already knows how much interest you earned. If you do not report it on your return, the IRS will notice the mismatch and may send you a notice or adjust your return.
What tax bracket determines what you owe
The tax on your interest depends on your total income for the year and which tax bracket you fall into. If you earned $10 in interest and your total income puts you in the 22% federal tax bracket, you do not automatically owe $2.20 in tax. Instead, that $10 is added to your income, and you pay tax on your total income at your bracket rate.
For example: if you earned $50,000 in wages and $100 in savings interest, your taxable income is $50,100. You pay federal income tax on the full $50,100 at the rates for your filing status and bracket. The interest itself is not taxed separately — it is part of your total income.
The more interest you earn, the higher your total income becomes, which can push you into a higher tax bracket. This is one reason high-yield savings accounts, which pay significantly more interest than traditional savings accounts, can increase your tax bill noticeably.
When you do not have to report interest
The IRS has a threshold: if your total interest income for the year is less than $10, you technically do not have to report it. However, your bank may still issue a 1099-INT if they issued one in prior years or if their system is set to do so. If you receive a 1099-INT, the safest approach is to report the amount shown, even if it is below $10.
This threshold applies only to interest. If you have other types of income — dividends, capital gains, rental income — those are counted separately and have their own reporting rules.
If you are a dependent on someone else's tax return (such as a teenager with a part-time job and a savings account), the rules are different. Your parent or guardian may be required to report your interest on their return, or you may need to file your own return depending on your total income. Check with a tax professional if you are unsure.
State and local taxes on savings interest
Most states tax savings interest at their regular income tax rate. If your state has a 5% income tax rate, you owe 5% tax on your interest income. Some cities also tax income, adding another layer on top of state tax.
Nine states have no income tax: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, Wyoming, and New Hampshire (which taxes only interest and dividends, though this is changing). If you live in one of these states, you owe no state income tax on your savings interest, only federal.
If you moved during the year or lived in more than one state, you may owe tax to multiple states. Some states have reciprocal agreements that prevent double taxation, but you will need to file returns in each state where you lived or worked. This is complex enough that a tax professional can help sort it out.
High-yield savings accounts and tax impact
High-yield savings accounts currently pay between 4% and 5% annual interest, compared to 0.01% or less at traditional banks. This means the interest you earn — and the tax you owe — is much higher. A $10,000 deposit in a high-yield account might earn $400 to $500 per year, versus $1 or less in a traditional account.
That $400 to $500 is added to your taxable income. If you are in the 22% federal tax bracket, you owe roughly $88 to $110 in federal tax on that interest alone. Add state tax, and the total can be $100 to $150 depending on where you live.
This does not mean high-yield accounts are a bad choice — the interest you keep after taxes is still more than you would earn elsewhere. But it is a real cost to factor in when comparing accounts. Some people use high-yield accounts for short-term savings and traditional accounts for money they plan to keep longer, to balance interest earnings against tax liability.
Reporting interest on your tax return
On the federal return, interest income goes on Schedule B (Interest and Ordinary Dividends) if your total interest and dividends exceed $1,500, or directly on Form 1040 if they are below that threshold. Most tax software walks you through this automatically once you enter the 1099-INT information.
If you file by hand, you add up all interest from all sources (savings accounts, CDs, bonds, money market accounts) and enter the total on the appropriate line. The IRS matches this against the 1099-INT forms they received from your banks, so the numbers must match.
If you have a spouse and file jointly, you report both spouses' interest combined on one return. If you file separately, each spouse reports only their own interest.
Frequently Asked Questions
Do I owe taxes on interest if I did not withdraw the money?
Yes. The IRS taxes interest in the year it is earned, not in the year you withdraw it. If your account earned $50 in interest in 2024 but you did not touch the account, you still owe tax on that $50 in 2024. The interest stays in the account and compounds, but it is taxable income the moment the bank credits it.
What if my savings account interest is only a few dollars?
You still report it if you receive a 1099-INT. The IRS threshold of $10 is a guideline, not a hard rule, and most banks issue a 1099-INT for any interest paid. Reporting a small amount takes seconds and keeps you in compliance. If you do not receive a 1099-INT and your interest was genuinely under $10, you can reasonably omit it, but reporting it is safer.
Can I deduct savings account fees from the interest I report?
No. You report the full interest amount shown on the 1099-INT. Fees are not deducted from your taxable interest income. However, if you paid investment fees or tax preparation fees, those may be deductible under other rules — consult a tax professional about your specific situation.
Do I owe taxes on interest earned in a CD or money market account?
Yes, the same rules explore. CDs, money market accounts, and regular savings accounts all generate interest that is taxable income. Each institution issues a 1099-INT, and you report all of it on your return.
What about interest in a retirement account like an IRA?
Interest earned inside an IRA, 401(k), or other retirement account is not taxed in the year it is earned. You do not receive a 1099-INT for it. Taxes are deferred until you withdraw money from the account in retirement, and the rules depend on whether the account is traditional or Roth. This is a separate tax system from regular savings accounts.