You pay tax on the interest your savings account earns, not on the money you deposited

The money you put into a savings account is yours — you do not owe tax on it. But the interest the bank pays you is income, and the IRS treats it the same way it treats wages or freelance earnings. If your account earned $10 in interest over a year, you owe tax on that $10. The amount of tax depends on your overall income and your tax bracket, not on how much money sits in the account.

The bank reports what you earned to both you and the IRS on a form called a 1099-INT. You receive this form by January 31 each year if you earned $10 or more in interest during the previous year. You then report that interest on your tax return, usually on Schedule 1 (Form 1040) or directly on the 1040 itself, depending on your filing situation.

Key Takeaways

  • Interest earned in a savings account is taxable income; the principal (money you deposited) is not.
  • Banks send you a 1099-INT form if you earned $10 or more in interest during the year, and they also send a copy to the IRS.
  • You report savings account interest on your federal tax return, and it is taxed at your ordinary income tax rate.
  • Some states also tax savings account interest, while others do not — this varies by where you live and file taxes.
  • High-yield savings accounts earn more interest, which means you will owe more tax, but the after-tax return is still usually higher than traditional savings accounts.

How the IRS knows about your interest income

Every bank in the United States is required to report interest paid to account holders. The bank calculates how much interest you earned during the calendar year (January 1 through December 31), rounds it to the nearest dollar, and reports it on the 1099-INT form. The bank keeps a copy for its records, sends one to you, and sends one to the IRS.

You will receive your 1099-INT by January 31 of the year following the year you earned the interest. If you earned interest in 2024, you get the form by January 31, 2025. If you had multiple savings accounts or other interest-bearing accounts (money market accounts, CDs, bonds), you may receive multiple 1099-INT forms — one from each institution, or sometimes one combined form if the same bank holds multiple accounts.

The IRS receives its copy at the same time. When you file your tax return, the IRS matches what you report against what the bank reported. If the numbers do not match, you may receive a notice asking for an explanation.

What tax rate applies to your interest income

Savings account interest is taxed as ordinary income, meaning it is added to your wages, self-employment income, and any other income you earned that year. Your total income then determines which tax bracket you fall into, and that bracket determines your tax rate.

If you earned $50,000 in wages and $500 in savings account interest, the IRS treats your taxable income as $50,500. That extra $500 is taxed at your marginal rate — the rate that applies to your highest dollars of income. For most people, this is higher than the rate that applies to long-term capital gains or may have access to dividends, which have their own lower tax brackets.

The federal tax rate on ordinary income ranges from 10% to 37% depending on your income level and filing status. A person in the 22% bracket who earned $100 in savings interest would owe $22 in federal tax on that interest alone (before any state tax). Someone in the 12% bracket would owe $12.

State taxes on savings account interest

Most states that have an income tax also tax savings account interest the same way the federal government does — as ordinary income. A few states do not tax interest income at all. The states with no income tax on interest are: Alaska, Florida, Illinois, Mississippi, Missouri, New Hampshire (on dividends and interest only, not wages), South Dakota, Tennessee, Texas, Washington, and Wyoming.

If you live in a state with an income tax, you will report your savings interest on your state return as well as your federal return. The state tax rate varies — some states tax ordinary income at rates below 5%, while others go as high as 13%. Your total tax bill on savings interest is the federal rate plus your state rate (if applicable).

If you moved during the year or worked in a state different from where you live, the rules become more complex. Some states tax you based on where you earned the income; others tax based on where you lived. If you are in this situation, you may need to file returns in multiple states.

When you do not have to report interest income

If you earned less than $10 in interest during the year, the bank does not send you a 1099-INT form. However, you are still technically required to report that interest on your tax return if you are filing one. In practice, amounts under $10 rarely trigger IRS scrutiny, but the requirement exists.

If you did not earn enough income to require filing a tax return at all, you do not have to file even if you earned interest. The threshold for filing depends on your age, filing status, and type of income. For example, in 2024, a single person under 65 with only wage or interest income does not have to file unless their income exceeded $14,600. But if you earned a refund through withholding or tax credits, filing anyway would get you that money back.

How high-yield savings accounts affect your tax bill

A high-yield savings account earns significantly more interest than a traditional savings account — sometimes 4% to 5% annually compared to 0.01% or less at big banks. This higher interest means a higher tax bill. If you have $10,000 in a high-yield account earning 4.5%, you earn $450 in interest per year. At a 22% federal tax rate, that is $99 in federal tax owed.

Despite the higher tax, a high-yield account is usually still better than a traditional savings account after taxes. The same $10,000 in a traditional account earning 0.01% generates $1 in interest and roughly $0.22 in tax. The high-yield account leaves you with roughly $351 more after taxes ($450 minus $99, compared to $1 minus $0.22).

The trade-off is worth understanding, though. If you are in a high tax bracket (32% or higher), the after-tax return shrinks. Someone in the 37% bracket earning $450 in interest owes $166.50 in federal tax alone, leaving $283.50. Still ahead of the traditional account, but the tax bite is real.

Reporting interest on your tax return

When you file your federal return, you report interest income on Schedule 1 (Form 1040), line 8, or directly on the 1040 itself if you use the short form. You enter the total interest from all your 1099-INT forms combined. If you received multiple forms, add them together and report one total number.

Keep your 1099-INT forms with your tax records for at least three years. The IRS can audit returns going back that far, and you will need the form to prove what you reported if questions arise. You do not send the 1099-INT to the IRS with your return — they already have a copy — but you do need it for your own records and to fill out your return accurately.

If you file state taxes, you report the same interest income on your state return as well. The form and line number vary by state, but the concept is the same: add up all interest earned and report it as income.

Frequently Asked Questions

Do I owe tax on interest if I do not file a tax return?

Technically yes, but practically it depends. If you are not required to file a return because your income is below the threshold, you do not have to file. However, if you are required to file for any reason (you earned wages, self-employment income, or other reportable income), you must report the interest even if it is small. If you file voluntarily to claim a refund, you must include the interest.

What if my bank did not send me a 1099-INT but I earned interest?

Contact the bank and ask them to issue one. Banks are required to send a 1099-INT if you earned $10 or more. If you earned less than $10, the bank is not required to send a form, but you should still report the interest on your return if you are filing one. If the bank refuses to send a form you believe you are owed, you can report the interest based on your account statements.

Can I deduct savings account fees from the interest I report?

No. You report the full interest amount on your return; you cannot subtract fees. However, some savings accounts have no fees, and high-yield accounts often have no minimum balance or monthly charges, so the interest you earn is not reduced by fees.

Does a joint savings account change how interest is taxed?

The interest is still taxable income, but how it is reported depends on the account ownership. If the account is owned equally by two people, each person reports half the interest on their own return. If one person owns the account and the other is just an authorized user, the owner reports all the interest. The 1099-INT will show who the primary account holder is; that person receives the form.

Is interest from a savings account taxed differently than interest from a CD or money market account?

No. All interest from deposit accounts — savings accounts, money market accounts, certificates of deposit, and similar products — is taxed as ordinary income and reported on a 1099-INT. The type of account does not matter; the interest is treated the same way for tax purposes.