Yes, you pay federal income tax on savings account interest

The interest your bank pays you counts as income to the IRS, just like wages or a paycheck. You owe federal income tax on every dollar of interest your account earns, no matter how small the amount. Most savings accounts earn very little interest, so the tax you owe is usually small — but it is still a real tax obligation.

Your bank will send you a form called a 1099-INT (Interest Income) if your interest earnings reach a certain threshold. The threshold varies by bank, but many banks send the form if you earned $10 or more in interest during the year. Even if your bank does not send you a 1099-INT, you still owe tax on the interest you earned.

The tax rate you pay depends on your overall income and tax bracket. Interest is taxed as ordinary income, meaning it is added to your other income and taxed at your regular rate — not at a lower capital gains rate. If you earn $35,000 a year and your savings account earns $50 in interest, your taxable income becomes $35,050.

Key Takeaways

  • All savings account interest is taxable income at the federal level, regardless of the amount.
  • Your bank sends you a 1099-INT form if interest reaches the bank's reporting threshold, usually $10 or more.
  • You report interest income on your tax return even if you do not receive a 1099-INT form.
  • Some states tax interest income and some do not, so check your state's rules separately.
  • Interest is taxed as ordinary income at your regular tax rate, not at a lower rate.

When your bank sends you a 1099-INT form

The 1099-INT is the official record of interest you earned. Your bank is required to send copies to you and to the IRS if your interest crosses their reporting threshold. Most banks use $10 as the threshold, though some use $1 and a few use higher amounts — check your bank's website or call to find out their specific rule.

You receive the 1099-INT by January 31 of the year after you earned the interest. For example, interest you earned in 2024 appears on a 1099-INT you receive in January 2025. The form shows the account number, the total interest paid, and sometimes a breakdown by month.

If you have multiple savings accounts at the same bank, the interest from all of them may be combined on a single 1099-INT. If you have accounts at different banks, each bank sends its own 1099-INT. Keep all your 1099-INT forms — you will need them when you file your tax return.

Reporting interest on your tax return

You report interest income on Schedule B (Interest and Ordinary Dividends), which is part of your federal tax return. Schedule B asks you to list each source of interest and the amount. If you have only one savings account and received a 1099-INT, you enter the information from that form.

The total interest from Schedule B transfers to your main tax form (Form 1040). This is where the interest gets added to your other income and taxed at your regular rate. If you use tax software or a tax preparer, they usually handle this transfer automatically once you enter the 1099-INT information.

If your interest did not reach your bank's reporting threshold and you did not receive a 1099-INT, you still report the interest. Look at your bank statements for the year and add up all the interest deposits. Enter that total on Schedule B even though you have no 1099-INT to reference.

State income tax on savings interest

Whether you owe state income tax on savings interest depends on which state you live in. Most states that have an income tax tax interest income the same way the federal government does — as ordinary income at your regular rate. A few states exempt interest income from state tax, and a handful have special rules.

If you live in a state with no income tax — such as Florida, Texas, Wyoming, or South Dakota — you owe no state tax on your interest. If you live in a state with income tax, contact your state tax authority or check their website to learn their specific rule. Some states have different thresholds than the federal government for when they require reporting.

Your bank may not send you a separate state tax form. You may need to look at your 1099-INT and your bank statements to figure out what to report to your state. Some tax software includes state return preparation and will guide you through this step.

How much tax you actually owe

The amount of tax depends on your tax bracket and the amount of interest. If you are in the 12% federal tax bracket and earn $100 in interest, you owe roughly $12 in federal tax on that interest (before any deductions or credits that might lower your overall tax). If you are in the 22% bracket, you owe roughly $22.

Most people with savings accounts earn very little interest — often less than $50 per year — so the tax is small. A high-yield savings account might earn more, but even then, the interest is usually modest compared to your overall income. The key point is that you do owe tax on whatever interest you earn, even if the amount is tiny.

If you have a very large savings balance and earn significant interest, or if you have other income sources, consider talking to a tax preparer or accountant. They can help you understand your total tax picture and whether you might benefit from other strategies, like tax-deferred retirement accounts.

Interest from money market accounts and CDs

The same tax rule applies to interest from money market accounts and certificates of deposit (CDs). Both are taxed as ordinary income, and both generate 1099-INT forms if the interest crosses the reporting threshold. The bank holding the account sends the form, just as with a savings account.

CDs have one wrinkle: if you withdraw money early, you usually pay a penalty. That penalty is not tax-deductible, but it does reduce the interest you actually receive. You report only the interest you keep after the penalty, not the full interest the CD would have earned.

If you have a CD that matures in a future year, you may owe tax on the interest in the year it is earned, not the year you withdraw it. Check your CD agreement or ask your bank about their specific rule — some CDs pay interest annually, some at maturity, and the timing affects when you report it.

Frequently Asked Questions

What if I earned less than $10 in interest?

You still owe tax on it, even if your bank did not send a 1099-INT. The $10 threshold is just when banks are required to report to the IRS — it is not a threshold for owing tax. Add up all your interest from your bank statements and report it on your tax return.

Can I deduct the tax I pay on interest?

No. Interest income is taxed, but you cannot deduct the tax itself as a separate item. However, if you paid interest on a loan (such as a mortgage or student loan), that interest may be deductible under different rules — check with a tax preparer about your specific situation.

Do I need to file a tax return if my only income is interest?

It depends on the amount and your age. The IRS sets a threshold called the "standard deduction" — if your total income is below that threshold, you do not have to file. For 2024, the threshold is around $14,000 for most single people, though it is higher if you are 65 or older. Check the IRS website or a tax preparer to see if you must file.

What if my bank sent me a 1099-INT but I did not receive it?

Contact your bank and ask them to resend it or provide the information. You can also check your online banking portal — many banks let you read tax forms there. If you still cannot get the form, use your bank statements to calculate the interest and report it on your return anyway.

Does interest from a joint account get split between owners for tax purposes?

Not automatically. The bank reports all the interest to the IRS under one tax ID (usually the primary account holder's). You and the other owner need to decide how to split the interest for tax purposes and report it correctly on your individual returns. This is a situation where a tax preparer can help you get it right.