You pay taxes only on the interest your savings account earns, not on the money you deposit

The money you put into a savings account is yours — you already paid taxes on it when you earned it as income. The bank does not tax you for holding it there. What does get taxed is the interest the bank pays you for letting them use your money. If your savings account earned $50 in interest last year, that $50 is taxable income. The original $5,000 you deposited is not.

This matters because many people assume their entire savings balance is taxable, which is not how it works. Your bank will send you a form at the end of the year showing exactly how much interest you earned. That number — not your account balance — is what you report to the IRS.

Key Takeaways

  • You do not pay income tax on the money you deposit into a savings account, only on the interest the bank pays you.
  • Your bank reports interest earnings to you on a 1099-INT form, which you receive by January 31 each year.
  • Interest income must be reported on your tax return, even if the amount is small or the bank did not send a form.
  • High-yield savings accounts earn more interest than traditional savings accounts, which means more taxable income but also more money in your account.

How banks report your interest earnings

At the end of each calendar year, your bank calculates the total interest you earned and sends you a 1099-INT form. This form shows the interest amount in Box 1. You should receive it by January 31. If you have multiple savings accounts at different banks, you will receive a separate 1099-INT from each one.

The bank also sends a copy to the IRS, so the IRS already knows how much interest you earned. This is why you must report it on your tax return — the IRS will notice if you do not. Even if the interest is only a few dollars, you still need to include it.

If you earned less than $10 in interest at a particular bank, that bank may not send you a 1099-INT form. However, you still owe tax on that interest and should report it on your return. Keep your bank statements as proof of what you earned.

When interest becomes taxable income

Interest becomes taxable in the year you earn it, not when you withdraw the money. If your savings account earned $25 in interest during 2024, that $25 is taxable income on your 2024 tax return — even if you leave the money in the account and do not touch it.

Some savings accounts compound interest, meaning the bank adds interest to your balance, and then pays you interest on that interest. All of it counts as taxable income in the year it is credited to your account. The IRS does not care whether you spent the interest or left it sitting there.

The difference between savings accounts and other accounts

A regular savings account at a bank or credit union works the same way: interest is taxable, deposits are not. A money market account — which is similar to a savings account but sometimes pays slightly higher interest — also reports interest on a 1099-INT and is taxed the same way.

A certificate of deposit (CD) is different in one important way. You agree to leave your money untouched for a set period (like six months or one year). The interest is still taxable, and you still get a 1099-INT. But if you withdraw the money before the term ends, you usually pay an early withdrawal penalty. That penalty is not tax-deductible, so you lose money both ways.

Tax-advantaged accounts like Individual Retirement Accounts (IRAs) and 401(k)s work differently — interest earned inside them is not taxed each year. But those are separate account types with their own rules, not regular savings accounts.

How much interest you earn depends on the account type

A traditional savings account at a large bank might earn very little interest — sometimes less than 0.01% per year. A high-yield savings account at an online bank might earn 4% or 5% per year, depending on what the Federal Reserve has set as its benchmark rate. The higher the interest rate, the more you earn, and the more you owe in taxes.

This is not a reason to avoid high-yield accounts. Earning $200 in interest and paying tax on it is better than earning $5 in interest and paying tax on that. You still come out ahead. But it is worth knowing that moving to a higher-yield account will increase your taxable income.

What to do if you did not receive a 1099-INT

If you earned interest but your bank did not send you a 1099-INT form, you still need to report the interest on your tax return. Check your bank statements to find the total interest earned during the year. You can report it on your return even without the form.

If you think you should have received a 1099-INT but did not, contact your bank and ask them to send it. Banks are required to send these forms by January 31. If it is already February and you have not received one, call the bank's customer service line and request a copy.

Keep copies of your bank statements for at least three years. The IRS can ask you to prove what you reported, and your statements are the best proof you have.

Frequently Asked Questions

Do I have to report interest if it is less than $10?

Yes. Even small amounts of interest are taxable income and must be reported on your tax return. Your bank may not send a 1099-INT for amounts under $10, but you still owe tax on it. Use your bank statements to calculate the total.

What if I have multiple savings accounts?

You report the interest from each account separately on your tax return, but you add them all together on one line. If you have three savings accounts earning $15, $22, and $8 in interest, you report $45 total. Each bank sends you its own 1099-INT.

Is the interest taxed as regular income or at a special rate?

Savings account interest is taxed as ordinary income at your regular tax rate. It is not taxed at the lower capital gains rate. The rate you pay depends on your total income and your tax bracket for the year.

Can I deduct any costs related to my savings account?

No. Savings account fees are not tax-deductible. If your bank charged you a monthly fee, you cannot write that off. However, you should choose an account with no fees to avoid losing money.

What happens if I move money between my own savings accounts?

Moving money between your own accounts is not taxable. Only the interest the bank pays you is taxable. Transferring $1,000 from one savings account to another does not create any tax event.