Yes, you pay federal income tax on savings account interest

The interest your bank pays you on a savings account is taxable income. The IRS treats it the same way it treats wages or other money you earn — you owe federal income tax on it. Most states also tax savings interest as part of your state income tax, though a few states do not.

The amount of tax you owe depends on how much interest you earned and your overall income for the year. If you earned very little interest, you might owe no tax at all. If you earned a lot, you could owe a significant amount. Your bank will report what you earned to both you and the IRS, so the IRS will know whether you report it correctly.

This applies to all types of savings accounts — regular savings accounts, money market accounts, and certificates of deposit (CDs). High-yield savings accounts earn more interest, which means you will owe tax on a larger amount, but the tax rule is the same.

Key Takeaways

  • Banks report savings interest to the IRS on a Form 1099-INT, and you must report the same amount on your tax return.
  • You owe federal income tax on all savings interest, and most states tax it as well.
  • The tax you owe depends on your tax bracket — the higher your income, the higher the percentage of interest that goes to taxes.
  • If you earned less than $10 in interest during the year, your bank may not send you a Form 1099-INT, but you still owe tax on it if you have other income.

How your bank reports interest to the IRS

Your bank sends you a Form 1099-INT each January for any interest you earned the previous year. This form shows the exact dollar amount of interest paid to your account. The bank sends a copy to the IRS at the same time, so the IRS knows what you earned.

You then report this same amount on your federal tax return. If the amount on your 1099-INT does not match what you report, the IRS will notice and may contact you. For this reason, it is important to keep your 1099-INT and check it against your bank statements to make sure the number is correct.

Some banks do not send a 1099-INT if interest was very small — typically less than $10 — but you still owe tax on that interest if you have other income. You would need to add it up yourself from your bank statements and report it on your return.

Understanding tax brackets and how much you actually owe

The amount of tax you pay on savings interest depends on your tax bracket, which is determined by your total income for the year. Your tax bracket is a percentage — for example, 10%, 12%, 22%, or higher. The higher your income, the higher your bracket.

If you earned $500 in savings interest and your tax bracket is 12%, you would owe $60 in federal income tax on that interest (12% of $500). If your bracket is 22%, you would owe $110. The same $500 in interest results in different tax bills depending on your income level.

This is why high-yield savings accounts can be tricky: they pay more interest, which is good, but you also owe more tax on that interest. A high-yield account paying 4% interest on $10,000 earns $400 in a year. If your tax bracket is 22%, you owe $88 in federal tax on that $400, leaving you with $312 in actual gain.

State taxes on savings interest

Most states tax savings interest as part of your state income tax return. The rate varies by state — some states have no income tax at all, while others tax interest at rates ranging from 1% to over 10%.

A few states do not tax interest income: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming have no state income tax. If you live in one of these states, you owe federal tax on your savings interest but no state tax. If you live elsewhere, check your state's tax rules or ask a tax preparer about your state's rate.

When you might owe no tax on savings interest

If your total income for the year is very low, you may not owe any federal income tax at all, even if you earned savings interest. The IRS sets a standard deduction — an amount of income you can earn without owing tax. For 2024, the standard deduction is $14,600 for a single person and $29,200 for a married couple filing jointly, though these amounts change each year.

If your total income (including savings interest) is below your standard deduction, you owe no federal income tax. For example, if you are single, earned $12,000 in wages, and $1,500 in savings interest, your total income is $13,500 — below the $14,600 standard deduction, so you owe no federal tax.

However, you may still need to file a tax return to report the interest, and you should check whether you owe state tax. Some states have lower thresholds than the federal standard deduction.

How to report savings interest on your tax return

When you file your federal tax return, you report the interest from your 1099-INT on Schedule B (Interest and Ordinary Dividends). You list each account's interest separately if you have multiple accounts, though most people straightforward add them up and report the total.

The total from Schedule B then transfers to your main tax form (Form 1040), where it becomes part of your total income. This total income determines your tax bracket and how much tax you owe overall.

If you use tax software, it will usually walk you through entering the 1099-INT information. If you work with a tax preparer, bring your 1099-INT forms with you. If you file by hand, refer to the IRS instructions for Schedule B, which are free and available on the IRS website.

The difference between gross interest and net interest

The interest your bank reports on your 1099-INT is the full amount you earned — called gross interest. This is the number you report on your tax return, even though you do not keep all of it after taxes.

The amount you actually keep after paying taxes is sometimes called net interest or after-tax interest. If you earned $500 in gross interest and owe $110 in federal tax plus $30 in state tax, your net interest is $360. This is why it is useful to think about your tax bracket when choosing between a regular savings account and a high-yield account — the higher interest rate is only valuable if the after-tax amount is still better.

Frequently Asked Questions

Do I have to report savings interest if it is a very small amount?

If your bank sends you a 1099-INT, you must report it, no matter how small. If your bank does not send one (usually because interest was under $10), you still owe tax on it if you have other income, but you will need to calculate and report it yourself using your bank statements.

What if I earned interest in multiple savings accounts?

Each bank sends its own 1099-INT. You report the interest from each one on Schedule B, then add them all together for your total interest income. The IRS receives copies of all your 1099-INTs, so report all of them.

Can I deduct the taxes I pay on savings interest?

No. You report the gross interest (before taxes) as income, and then you owe tax on it. You cannot deduct the tax itself. However, if you paid state taxes on your savings interest, you may be able to deduct state and local taxes (up to $10,000) on your federal return if you itemize deductions.

Does a CD count as savings interest for tax purposes?

Yes. Interest from a certificate of deposit is taxed the same way as interest from a regular savings account. Your bank reports it on a 1099-INT, and you report it on your tax return. You owe tax on the interest even if you have not withdrawn the money yet.

What happens if my 1099-INT has the wrong amount?

Contact your bank and ask them to issue a corrected 1099-INT (called an amended 1099-INT). Once you receive it, file an amended tax return if you have already filed. If you catch the error before filing, just report the correct amount on your return and keep the corrected 1099-INT with your records.