Yes, you owe state income tax on savings account interest in most states
Interest earned in a savings account is taxable income at both the federal and state level in 41 states plus Washington, D.C. The interest counts as ordinary income, taxed at your regular state income tax rate—the same rate applied to wages or salary. Your bank reports this interest to you on a Form 1099-INT, and you report it on your state tax return.
Nine states have no state income tax at all: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, Wyoming, and New Hampshire (which taxes only interest and dividends, but exempts interest earned after 2023). If you live in one of these states, you owe no state tax on savings interest, though you still owe federal tax.
The amount of interest you earn determines whether you must report it. Most states require reporting only if interest exceeds a threshold—commonly $10 to $25 per year, though some states have no minimum. Your bank will send you a 1099-INT if interest reaches $10 or more, but you may owe tax on smaller amounts depending on your state's rules.
Key Takeaways
- Savings account interest is taxed as ordinary income at your state's regular tax rate in 41 states and Washington, D.C.
- Nine states—Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, Wyoming, and New Hampshire—do not tax interest income.
- Your bank reports interest of $10 or more on Form 1099-INT, which you use to complete your state tax return.
- The threshold for reporting interest varies by state, ranging from $10 to $25 or sometimes no minimum at all.
How state tax on interest works
When you earn interest in a savings account, high-yield savings account, or money market account, that interest is added to your taxable income for the year. Your state treats it the same way it treats wages: you report the total amount and pay tax at your marginal rate. If you earn $500 in interest and your state income tax rate is 5%, you owe $25 in state tax on that interest alone.
The tax is due when you file your state income tax return, typically by April 15 of the following year. You do not pay it separately to the bank or to your state—you include the interest income on your return and calculate the tax owed as part of your overall state tax liability. If you have taxes withheld from wages, the interest may be covered by that withholding, or you may owe additional tax when you file.
Some states allow deductions or credits that reduce the tax on interest. For example, a few states exempt interest earned by residents over a certain age, or allow a small deduction for interest income. Check your state's tax instructions or contact your state revenue department to learn whether any exemptions explore to you.
What happens if you earn interest below the reporting threshold
If your interest income falls below your state's reporting threshold, your bank will not send you a 1099-INT. However, you may still owe tax on that interest. The threshold determines whether the bank must report it to you and the state—not whether you owe tax.
For example, if you earned $8 in interest and your state's threshold is $10, your bank will not issue a 1099-INT. But if your state taxes all interest income with no minimum, you still owe tax on that $8. You would report it on your return based on your own records—the interest shown in your account statement or online banking portal.
In practice, very small amounts of interest rarely trigger an audit or penalty. But the safest approach is to report all interest income, regardless of amount, unless your state explicitly exempts it.
States with no income tax and states with special rules
The nine states with no state income tax do not tax savings interest at all. If you live in Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, or Wyoming, you owe no state tax on interest income. New Hampshire is a partial exception: it taxes interest and dividends, but interest earned after December 31, 2023, is exempt from state tax.
A few other states have special rules. Illinois exempts interest income entirely. Connecticut exempts interest earned by residents over 62. Some states allow a small deduction—for example, Vermont allows a $100 deduction on interest and dividend income. These rules change periodically, so verify your state's current rules before filing.
If you moved to a different state during the year, you may owe tax to both your old state and your new state on interest earned while you lived in each. File a part-year resident return in both states and report only the interest earned during the months you lived there.
How to report interest on your state tax return
You report savings account interest on your state income tax return using the same amount shown on your federal return. Most state returns have a line for interest income, usually near the top of the form where you list all income sources. If you received a 1099-INT from your bank, copy the amount from Box 1 (interest income) onto your state return.
If you earned interest below the reporting threshold and did not receive a 1099-INT, use the amount shown in your account statement or online banking portal. Add up interest from all accounts—savings, money market, CDs, and any other interest-bearing accounts—and report the total on one line.
Some states use a simplified short form if your income is below a certain level. If you use a short form, check whether it includes a line for interest income. If not, you may need to file the full form to report the interest, even if your total income would otherwise may have access to for the short form.
Interest from certificates of deposit and money market accounts
Interest from CDs and money market accounts is taxed the same way as savings account interest. Your bank reports it on a 1099-INT, and you report it on your state return at your regular tax rate. The only difference is timing: if you have a CD that matures in January, you receive the interest in that year and report it on that year's return, even if you purchased the CD in the previous year.
If you withdraw money from a CD before maturity, you may owe an early withdrawal penalty. That penalty is separate from the tax on interest. The interest itself is still taxable income; the penalty is a cost you bear, not a tax deduction in most cases.
Some states allow you to defer reporting interest from certain CDs if the interest is not paid until the CD matures in a future year. Check your state's rules on accrued interest versus paid interest to see whether this applies to you.
What to do if you did not report interest in previous years
If you earned interest in prior years and did not report it on your state return, you can file an amended return. Most states allow you to amend returns for three to seven years back, depending on the state. Contact your state revenue department or a tax professional to learn your state's important date and the process for filing an amended return.
Filing an amended return may result in additional tax owed, plus interest and penalties. However, voluntarily correcting the error is usually better than waiting for the state to discover it. States rarely audit small amounts of unreported interest, but the risk increases if you have other income or if the interest is substantial.
If you are unsure whether you reported interest correctly in the past, a tax professional can review your prior returns and advise you on whether to amend them.
Frequently Asked Questions
Do I owe federal tax on savings interest even if my state does not tax it?
Yes. Federal income tax and state income tax are separate. Even if you live in a state with no income tax, you still report savings interest on your federal tax return and owe federal tax on it. The nine no-income-tax states do not tax interest, but the IRS does.
What if I have interest from multiple banks?
Add up all interest from all accounts and report the total on your state return. Each bank reports its interest separately on a 1099-INT, but you combine them into one total on your return. If you earned $200 at Bank A and $150 at Bank B, report $350 total.
Is interest from a joint account taxed differently?
Interest from a joint account is taxed to whoever reports it on their return. If you and your spouse own a joint account, you typically split the interest 50-50 and each report half on your own return. If you own a joint account with someone who is not your spouse, you may need to report all of it or split it differently—check your state's rules or consult a tax professional.
Do I owe state tax on interest if I am a minor?
Yes, minors owe state tax on interest income just like adults do. A parent or guardian files the return on the minor's behalf. Some states allow minors to file their own return if income is below a threshold, but interest is still taxable.
What if I moved states during the year?
You may owe tax to both states. File a part-year resident return in each state and report only the interest earned during the months you lived there. Your old state taxes interest earned before you moved; your new state taxes interest earned after you moved.