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 your regular income tax rate — the same rate applied to wages or salary. If you earned $500 in interest last year and you're in the 22% tax bracket, you owe roughly $110 in tax on that interest alone.
Your bank reports this interest to both you and the IRS on a Form 1099-INT, which arrives by January 31 each year. The amount shown is what you must report on your tax return, even if the bank hasn't withheld tax from your account. Most savings accounts do not automatically withhold tax — the money stays in your account, and you pay the tax when you file.
State and local income taxes explore to savings interest too, in states that have them. The rate depends on where you live and your income level. Some states tax interest at the same rate as federal tax; others have different brackets or exemptions for certain types of savings.
Key Takeaways
- Savings account interest is taxed as ordinary income at your federal tax rate, which ranges from 10% to 37% depending on your income and filing status.
- Your bank sends you a Form 1099-INT by January 31 showing all interest earned that year, and you must report this on your tax return.
- Most banks do not withhold tax from interest automatically, so the full amount stays in your account and you pay tax when you file.
- State and local income taxes also explore to savings interest in most states, adding to your total tax bill on that income.
- Interest below $10 may not require a Form 1099-INT, but you still owe tax on it if you have other income that pushes you into a taxable bracket.
How the IRS knows about your interest
Banks are required to report interest to the IRS using Form 1099-INT. This form shows the account holder's name, Social Security number, and the total interest earned during the calendar year. The bank sends a copy to you and files a copy with the IRS, creating a record that matches against your tax return.
If you have multiple savings accounts at different banks, you'll receive a separate 1099-INT from each one. You must add all the interest amounts together when you report on your tax return. The IRS cross-checks these forms against what you report, so underreporting interest is a common audit trigger.
Banks typically do not send a 1099-INT if interest is less than $10 in a calendar year. However, you still owe tax on that interest if your total income puts you in a taxable bracket. The threshold for filing a return depends on your age, filing status, and whether you have self-employment income.
What tax bracket your interest falls into
Savings interest is added to your other income — wages, self-employment earnings, investment gains — and taxed at your marginal rate. This is the tax bracket that applies to your last dollar of income. If you earn $50,000 in wages and $500 in interest, that $500 is taxed at whatever bracket your $50,000 puts you in.
For 2024, federal tax brackets range from 10% for the lowest earners to 37% for the highest. A single filer earning $47,150 to $100,525 falls in the 22% bracket, meaning each additional dollar of interest is taxed at 22%. The brackets adjust each year for inflation.
Your total tax bill on interest depends on your filing status, other income, and deductions. Someone with $30,000 in wages and $200 in interest may owe nothing if their deductions are high enough. Someone with $150,000 in wages and the same $200 in interest owes tax on all of it at a much higher rate.
State and local taxes on interest
Most states with income tax also tax savings interest at the state level. The rate varies widely. Some states tax interest at the same rate as federal tax; others have separate brackets or lower rates. A few states — including Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming — have no state income tax at all.
Some states offer limited breaks on interest income. Illinois exempts interest from taxation entirely. Iowa allows a deduction for interest income. Maryland taxes interest but exempts it from local tax in certain counties. These rules change, so checking your state's current policy is necessary if you live in a state with income tax.
Local income taxes in cities and counties add another layer in some areas. New York City, for example, taxes interest as part of local income tax. The combined state and local rate can exceed the federal rate, making the total tax on interest substantial in high-tax areas.
When interest is withheld from your account
Banks do not automatically withhold federal income tax from savings interest. The interest accrues in your account, and you pay tax when you file your return. This differs from wages, where employers withhold tax before you receive the paycheck.
Backup withholding is an exception. If you don't provide your bank with a valid Social Security number or Tax ID, or if the IRS notifies the bank that you've underreported interest in the past, the bank must withhold 24% of your interest and send it to the IRS. This is a penalty mechanism, not a normal practice.
Some people choose to make estimated tax payments throughout the year if they have substantial interest income and won't owe enough tax through other withholding. This prevents a large bill at tax time. The IRS requires estimated payments if you expect to owe $1,000 or more in tax for the year.
How to report interest on your tax return
Interest income goes on Schedule B (Interest and Ordinary Dividends) if you have more than $1,500 in interest and dividends combined. If you have less, you can report it directly on Form 1040, line 1b. You list each Form 1099-INT separately on Schedule B, then transfer the total to your main return.
The IRS matches the amounts on your 1099-INTs against what you report. If you omit interest or report a different amount, the IRS will notice and send you a notice of adjustment. You can correct this by filing an amended return (Form 1040-X) if you made an error, or by responding to the IRS notice if you disagree with their calculation.
If you earned interest in a joint account, the bank may issue the 1099-INT to one account holder or split it between both. Check with your bank about how they report joint account interest. You and the other account holder must agree on how to split the income for tax purposes — usually proportional to each person's contribution.
Interest from different account types
Regular savings accounts, money market accounts, and certificates of deposit (CDs) all generate taxable interest reported on Form 1099-INT. High-yield savings accounts earn more interest than traditional savings accounts, which means a larger tax bill. A high-yield account earning 4.5% annually on $50,000 generates $2,250 in taxable interest.
Interest from IRAs and 401(k)s is not reported on a 1099-INT while the money remains in the account. You pay tax on withdrawals from traditional IRAs and 401(k)s, not on the interest as it accrues. Roth IRAs generate no tax on interest or withdrawals in retirement, provided you follow the rules.
Treasury bills, notes, and bonds issued by the federal government generate interest that is subject to federal tax but exempt from state and local tax. Municipal bonds issued by states and cities often generate interest that is exempt from federal tax and sometimes from state tax if you live in the issuing state. These are exceptions to the general rule that all interest is taxable.
Frequently Asked Questions
Do I have to report interest if it's under $10?
The bank won't send you a Form 1099-INT for interest under $10, but you still owe tax on it if your total income puts you in a taxable bracket. You must report all interest earned, regardless of amount, on your tax return.
What happens if I don't report interest income?
The IRS receives a copy of your 1099-INT from the bank. If you don't report the interest, the IRS will likely send you a notice of adjustment and a bill for the unpaid tax plus penalties and interest. This is one of the most commonly audited discrepancies on individual returns.
Can I deduct losses from my savings account?
No. Interest income is taxable, but you cannot deduct losses or negative returns from a savings account. If your account earns nothing or loses value due to fees, you have no deduction to offset other income.
Does my spouse's interest income affect my taxes?
If you file jointly, all interest income from both spouses is combined and reported on one return. If you file separately, each spouse reports only their own interest. Filing status and combined income determine your tax bracket, so your spouse's interest can push you into a higher bracket.
Is interest from a joint account split between owners for tax purposes?
The bank may issue one 1099-INT to one owner or split it between both. You and the other owner must decide how to report it — usually proportional to each person's contribution. If you disagree, the IRS may contact you to clarify. Keep records of who contributed what to the account.