Yes, you owe federal income tax on savings account interest, and most states tax it too
The interest your bank pays you counts as ordinary income to the IRS. You report it on your tax return the same way you report wages or salary. The amount you owe depends on your total income and your tax bracket — not on how much interest you earned. A person in the 22% tax bracket pays roughly 22 cents in federal tax for every dollar of interest; someone in the 12% bracket pays roughly 12 cents.
Your bank will send you a Form 1099-INT each January if you earned $10 or more in interest during the previous year. You use that form to fill in the interest income line on your tax return. If you earned less than $10, the bank does not have to send the form, but you still owe tax on whatever interest you made.
Most states also tax savings interest as income, though a handful do not. New Hampshire and Tennessee, for example, do not tax interest income at all. Others tax it at their standard income tax rate. Check your state's revenue department website or ask your tax preparer what applies where you live.
Key Takeaways
- Savings account interest is taxed as ordinary income at your federal tax rate, whether you earned $5 or $5,000.
- Your bank sends Form 1099-INT when interest reaches $10 or more, but you owe tax on all interest regardless of whether you receive the form.
- Most states tax savings interest, but a few states do not — check your state's rules before filing.
- High-yield savings accounts earn more interest, which means you owe more tax, so the after-tax return is lower than the advertised rate.
How the IRS knows about your interest income
Banks report interest to both you and the IRS. When you open a savings account, you provide your Social Security number or tax ID. At the end of each calendar year, the bank calculates how much interest it paid you and files Form 1099-INT with the IRS. The IRS matches that form to your tax return to make sure you reported the income.
If you do not report interest income that the bank reported, the IRS will notice the mismatch. You may receive a notice asking you to explain the difference, or the IRS may straightforward assess the tax, penalties, and interest on its own. The penalty for not reporting interest income is usually 20% of the unpaid tax, plus interest that compounds daily.
You cannot avoid this by keeping the money in cash or moving it between banks. The IRS gets a copy of every 1099-INT your bank files, and the forms are matched to your Social Security number automatically.
What happens if you earned very little interest
If your savings account earned less than $10 in interest during the year, your bank does not have to send you a Form 1099-INT. However, you still owe tax on that interest. You report it on your tax return even though you did not receive an official form.
In practice, this matters most for people with very small balances or accounts that earned interest for only part of the year. A savings account with $500 earning 4% annual interest generates about $20 per year — well above the $10 threshold. But an account opened in November with $1,000 might earn only $3 or $4, which would not trigger a 1099-INT.
Keep your own records of all interest earned, even amounts under $10. Your bank statement shows the interest deposited each month, so you can add those up yourself if you need to.
How much tax you actually owe on interest
Your tax rate on interest depends on your total income for the year, not on the interest alone. The IRS uses tax brackets — income ranges where you pay a set percentage. For 2024, the federal brackets range from 10% to 37%, depending on your filing status and total income.
If you earned $50,000 in wages and $500 in interest, you do not pay 10% on the interest and 22% on the wages. Instead, the $500 is added to your $50,000, and the combined $50,500 is taxed according to the bracket rules. The interest is taxed at whatever your marginal rate is — the rate that applies to your last dollar of income.
For most people, that means interest is taxed at their ordinary income rate. If you are in the 22% bracket, you owe roughly $110 in federal tax on $500 of interest. State tax, if your state has it, is added on top.
The difference between high-yield and regular savings accounts
A regular savings account at a traditional bank might earn 0.01% annual interest. A high-yield savings account at an online bank might earn 4% or 5%. The higher rate means more money in your account — but also more tax owed.
If you have $10,000 in a regular savings account earning 0.01%, you make $1 per year and owe roughly $0.22 in federal tax (assuming a 22% bracket). If you move that $10,000 to a high-yield account earning 4.5%, you make $450 per year and owe roughly $99 in federal tax. The after-tax gain is $351 instead of $450 — still much better than the regular account, but lower than the advertised rate.
This is not a reason to avoid high-yield accounts. The after-tax return is still far better than a regular savings account. But it is worth understanding that the 4.5% rate is before tax, not after.
Tax-advantaged accounts that avoid interest tax
Some accounts let you earn interest without paying tax on it each year. A Roth IRA or Roth 401(k) grows tax-free, and you owe no tax on the interest, dividends, or gains when you withdraw the money in retirement. A traditional IRA or 401(k) defers the tax — you do not pay tax on the interest now, but you pay tax on the entire withdrawal when you take the money out in retirement.
A 529 college savings plan lets you earn interest tax-free if the money is used for education expenses. A Health Savings Account (HSA) grows tax-free if used for medical costs.
These accounts have contribution limits and withdrawal rules. A Roth IRA, for example, lets you contribute up to $7,000 per year (for 2024), and you cannot withdraw earnings before age 59½ without a penalty. But if you have money set aside for retirement or education, moving it into one of these accounts can save you significant tax on the interest.
Reporting interest on your tax return
When you file your federal return, you report interest income on Schedule B (if you have more than $1,500 in interest or dividends) or directly on Form 1040 (if you have less). You list each account separately if you received multiple 1099-INT forms, or you can combine them if you received only one.
The total goes on the "Interest" line of your return. If you use tax software, it usually walks you through entering the 1099-INT information, and the software calculates where it goes. If you use a tax preparer, bring all your 1099-INT forms and any statements showing interest earned on accounts that did not generate a form.
For state taxes, most states follow the federal rule and tax interest as ordinary income. You report it on your state return the same way. A few states have different rules — for example, some states exempt interest earned on certain types of bonds — so check your state's instructions or ask a preparer.
Frequently Asked Questions
Do I have to report interest if I did not get a 1099-INT form?
Yes. If your bank did not send a form because interest was under $10, you still owe tax on it. Keep your own records from your bank statements and report the total on your return. The IRS does not know about it unless you tell them, but failing to report it is tax evasion if discovered.
What if I have interest in multiple savings accounts?
Add up all the interest from all accounts and report the total on your tax return. If you received multiple 1099-INT forms, you can list them separately on Schedule B or combine them — the total is what matters. Your bank statements show the interest earned each month, so you can verify the 1099-INT amounts.
Can I deduct savings account interest as a loss?
No. Interest income is always taxable; you cannot deduct it as a loss or offset it against other income. You can deduct investment losses in some cases, but savings account interest is not an investment loss — it is income.
Does interest from a joint account get split between owners for tax purposes?
Not automatically. The bank reports the full interest amount on a 1099-INT, usually to the first account owner listed. You and the other owner need to decide how to split the tax responsibility and report it correctly on your individual returns. If you own the account 50-50, you might each report half the interest. Consult a tax preparer if the split is unclear.
Is interest from a savings account taxed differently than interest from a CD?
No. Interest from a certificate of deposit (CD), money market account, or any other savings product is taxed the same way as regular savings account interest — as ordinary income at your tax bracket rate. The bank sends a 1099-INT for CDs too if interest reaches $10.