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 savings account earned $50 in interest last year, that $50 is added to your total income for the year and taxed according to your tax bracket.

The amount you owe depends on how much interest you earned and your overall income. Someone in the 12% tax bracket who earned $100 in interest owes roughly $12 in federal tax on that interest. Someone in the 24% bracket owes roughly $24 on the same $100. State income tax, where your state has one, works the same way — the interest is added to your income and taxed at your state rate.

Your bank reports this interest to the IRS on a form called a 1099-INT. You receive a copy, and so does the IRS. You must report it on your tax return, even if the amount is small.

Key Takeaways

  • Savings account interest is taxed as ordinary income at your federal tax bracket rate, plus your state income tax rate if your state has one.
  • Your bank sends you a 1099-INT form by January 31 showing all interest earned during the previous year, and sends a copy to the IRS.
  • You report the interest on your federal tax return on Schedule 1, line 8, or on the appropriate line if you file a simplified return.
  • Interest earned in a traditional IRA or 401(k) is not taxed until you withdraw the money, but interest in a Roth IRA is never taxed.
  • If you earned less than $1,500 in interest during the year, you may still receive a 1099-INT, but you must report it regardless of the threshold.

When your bank sends you the 1099-INT form

Your bank mails or emails you a 1099-INT by January 31 of the year after you earned the interest. If you had a savings account open during 2024, you will receive the form by January 31, 2025, showing all interest earned from January 1 through December 31, 2024.

The form shows the total interest in box 1. If you had multiple savings accounts at the same bank, the total may combine interest from all of them. If you banked at more than one institution, you will receive a separate 1099-INT from each bank.

Keep the copy the bank sends you. You will need it when you file your tax return. The IRS receives its own copy automatically, so if you report a different amount on your return than what appears on the form, the IRS will notice.

How to report interest on your tax return

Where you report the interest depends on which tax form you file. Most people file Form 1040, the standard federal income tax return. On that form, you report interest income on Schedule 1, which is an attachment to the 1040. The interest goes on line 8 of Schedule 1, labeled "Interest."

If you use tax software, it will ask you for the interest amount and place it in the correct location automatically. If you file by hand, you write the total interest from all your 1099-INT forms on that line and add it to your other income.

Some people file a simplified 1040-SR (if you are 65 or older) or use Form 1040-NR if you are a nonresident alien. The location for interest income differs slightly on those forms, but the principle is the same: you report all interest earned during the year.

Interest in retirement accounts is handled differently

Interest earned inside a traditional IRA or 401(k) is not taxed in the year it is earned. The money grows tax-free while it sits in the account. You pay income tax only when you withdraw the money in retirement, and then you pay tax on the entire withdrawal amount, including all the interest that accumulated.

A Roth IRA works differently. Interest earned inside a Roth is never taxed, even when you withdraw it. If you contributed $5,000 to a Roth and it grew to $7,000 through interest and investment gains, you withdraw all $7,000 tax-free in retirement. You do not report the interest on your tax return in any year.

A 529 college savings plan also grows tax-free, and withdrawals for may have access to education expenses are not taxed. Interest earned in a 529 is reported differently than regular savings account interest and is not included on a 1099-INT.

What happens if you do not report the interest

The IRS matches the 1099-INT your bank sends against the interest you report on your return. If you do not report interest that appears on a 1099-INT, the IRS will likely send you a notice asking why. You may owe the tax plus penalties and interest charges on the unpaid amount.

Even if the interest is small — say, $15 — you must report it. The IRS does not have a threshold below which interest is ignored. If your bank issued a 1099-INT, the IRS expects to see that amount on your return.

If you genuinely did not receive a 1099-INT but earned interest, you still report the interest on your return. Contact your bank for the amount if you do not have a record of it.

How much tax you actually owe on interest

Your tax rate on interest depends on your total income and filing status. The federal tax system uses brackets: if your income falls in the 10% bracket, you pay 10% on the interest; if it falls in the 22% bracket, you pay 22%, and so on. For 2024, the brackets range from 10% to 37%.

Most people with savings accounts fall into the 12% or 22% bracket. If you earned $200 in interest and you are in the 22% bracket, you owe roughly $44 in federal tax on that interest. Your state may add its own tax on top of that.

The exact amount depends on your specific situation, so use a tax calculator or speak with a tax professional if you want a precise figure. What matters for reporting purposes is that you report the full interest amount on your return, and the tax is calculated based on your bracket.

High-yield savings accounts and interest reporting

High-yield savings accounts earn more interest than traditional savings accounts — sometimes 4% or 5% annually instead of 0.01%. That higher interest is still taxable income, reported the same way on a 1099-INT. If you earned $500 in interest from a high-yield account, you report all $500 on your tax return.

The higher interest can push you into a higher tax bracket if your total income is close to a bracket boundary, though this is uncommon. More often, the extra interest straightforward means you owe a bit more tax, but you still come out ahead because the interest earned exceeds the tax owed.

Some people move money to high-yield accounts specifically to earn more interest, knowing they will owe tax on it. The after-tax return is still usually better than keeping money in a low-interest account.

Frequently Asked Questions

Do I have to report interest if I only earned a few dollars?

Yes. There is no minimum amount. If your bank issued a 1099-INT, you must report the interest on your tax return, even if it is $5. The IRS receives a copy of every 1099-INT issued, so reporting it is necessary.

What if I earned interest in multiple accounts at different banks?

You will receive a separate 1099-INT from each bank. Add up the interest from all the forms and report the total on your tax return. You do not file multiple returns or report each account separately — just one combined total.

Can I deduct any expenses against the interest I earned?

Generally, no. Interest income is reported in full, and you cannot deduct account fees or other expenses against it. The interest is added to your income as-is, and your tax is calculated on the full amount.

Does interest in a money market account get taxed the same way?

Yes. Money market accounts are savings accounts, and interest earned in them is reported on a 1099-INT and taxed as ordinary income, just like interest from a regular savings account.

What if my bank made a mistake on the 1099-INT?

Contact your bank and ask them to issue a corrected form, called a 1099-INT with a corrected indicator. Once you receive the corrected form, report the correct amount on your tax return. If you have already filed, you may need to file an amended return.