Yes, you owe federal income tax on savings account interest, but only if your total interest crosses a reporting threshold
The interest your bank pays you on a savings account is taxable income. The IRS treats it the same way it treats wages or freelance earnings — money that came to you, so you owe tax on it. You report it on your federal tax return each year.
However, you only have to report it if the interest you earned meets the threshold your bank uses to send you a form. For most people, that threshold is $10 in interest during the calendar year. If you earned less than $10, you still owe tax on it, but you do not receive a form from the bank and the IRS does not expect a separate line item on your return — you can report it as part of your overall income or skip it if the amount is negligible.
State and local income taxes work the same way: interest is taxable income in states that have income tax. A few states do not tax interest income at all, but most do.
Key Takeaways
- All savings account interest is subject to federal income tax, regardless of the amount.
- Your bank sends you a Form 1099-INT only if you earned $10 or more in interest during the calendar year.
- If you earned less than $10, you still owe tax on it, but no form is issued and you report it on your return as miscellaneous interest income.
- Most states tax savings interest the same way the federal government does, though a handful of states do not tax interest income at all.
- The interest is taxed at your ordinary income tax rate, not at a special rate.
How the IRS knows about your interest
When your savings account interest reaches $10 or more in a calendar year, your bank is required to report it to the IRS using a Form 1099-INT. The bank sends you a copy and files another copy with the IRS. The IRS then cross-checks your tax return to see whether you reported that income.
This is why the $10 threshold matters: it is the point at which the bank must file the form with the IRS. Below $10, no form is issued, but the IRS still expects you to report the income if you file a return. In practice, very small amounts of interest are rarely audited, but technically you are required to report it.
If you have multiple savings accounts at different banks, each bank reports separately. If you earned $8 at one bank and $7 at another, you would not receive a 1099-INT from either one, but you would owe tax on the full $15.
What tax rate applies to your interest income
Savings account interest is taxed as ordinary income, meaning it is added to your other income and taxed at whatever rate applies to your total earnings for the year. It does not get a special lower rate the way some investment income does.
If you are in the 22% federal tax bracket, your interest income is taxed at 22%. If you are in the 12% bracket, it is taxed at 12%. The rate depends on your total income for the year, not on the source of the money.
This is different from capital gains or may have access to dividends, which can be taxed at preferential rates. Interest is treated more like wages.
State and local taxes on savings interest
Most states that have an income tax treat savings interest the same way the federal government does: it is ordinary income and you report it on your state return. A handful of states — including Illinois, Mississippi, and Tennessee — do not tax interest income at all, which means residents of those states owe federal tax but not state tax on their savings interest.
If you live in a state with local income tax (like New York City or Ohio), that locality also taxes your interest income unless it has a specific exemption for it. You would report the interest on your local return as well as your state and federal returns.
The amount of state and local tax you owe depends on your state's tax brackets and rates, which vary widely. A resident of California pays a higher rate on interest income than a resident of Colorado, for example.
How to report savings interest on your tax return
If you received a Form 1099-INT from your bank, you report the amount shown on that form on your federal return. The form goes in Schedule 1 (Other Income) if you are filing Form 1040, or it attaches to your return depending on which form you use. Your tax software will usually prompt you to enter the 1099-INT information, and the software will place it in the correct location.
If you earned interest but did not receive a 1099-INT because the amount was under $10, you can report it on Schedule 1 as miscellaneous interest income. You do not need a form to do this — you straightforward write in the amount. Many people skip this step for very small amounts, though technically it should be reported.
For state and local returns, you typically report the same interest income on the corresponding state or local form. Some states have a separate line for interest income; others fold it into total income. Your state's tax form or instructions will show where it goes.
Interest from different account types
The tax treatment is the same regardless of the account type. Interest from a regular savings account, a money market account, a certificate of deposit (CD), or a high-yield savings account is all taxable ordinary income. The account structure does not change the tax rule.
Interest from a traditional IRA or 401(k) is not taxed in the year it is earned — it grows tax-deferred inside the account. But when you withdraw money from those accounts in retirement, you owe tax on the withdrawals, including the interest that accumulated. Interest from a Roth IRA is never taxed, either when earned or when withdrawn, as long as you follow the withdrawal rules.
Interest from a 529 education savings plan is also tax-deferred while it sits in the account, and it is tax-free when withdrawn for may have access to education expenses. These special accounts are designed to let interest accumulate without annual tax bills.
What happens if you do not report interest income
If your bank files a 1099-INT with the IRS and you do not report that income on your return, the IRS will notice the discrepancy. Their matching system flags returns where reported income does not match the forms filed by banks and employers. You would likely receive a notice asking you to explain the difference or pay the tax owed plus interest and penalties.
The penalty for not reporting income is usually 20% of the unpaid tax, plus interest calculated from the original due date. If the IRS determines the omission was intentional rather than a mistake, the penalty can be higher.
For amounts under $10 where no form is issued, the risk of audit is much lower, but you are still technically required to report it.
Frequently Asked Questions
Do I owe tax on interest if I am not working and have no other income?
Yes. Interest income is taxable regardless of whether you have a job. However, if your only income is interest and it is below the standard deduction for your filing status, you may not owe federal tax even though you technically have taxable income. You would still need to file a return to claim that exemption, or you can straightforward report the interest and owe nothing.
What if I earned interest in a joint account with my spouse?
The bank reports the full interest amount on a single 1099-INT, usually in the name of the first account holder. You and your spouse need to decide how to split the income on your tax returns — typically 50/50 unless you have a different agreement. You may each report half on your individual returns, or one spouse reports it all and the other reports none, depending on your filing status and situation.
Can I deduct savings account fees from the interest I report?
No. You report the full interest amount shown on the 1099-INT. Account fees are not deductible against interest income. However, if a bank charges you a fee and credits you interest in the same month, the net amount is what appears on your statement and on the 1099-INT, so you are not double-taxed.
Do I owe tax on interest if I moved to a different state during the year?
You owe tax to both states on a prorated basis. If you lived in State A for six months and State B for six months, you report half your interest income to each state. Your tax software can usually handle this calculation, or you can contact each state's tax authority for guidance on how to split the income.
What if my savings account earned less than $1 in interest?
You still owe federal tax on it, though the amount is negligible. No 1099-INT is issued. You can report it on your return as miscellaneous interest income, or if your total income is below the standard deduction, you may not owe tax anyway. For practical purposes, amounts under $1 are rarely pursued by the IRS.