Savings account interest counts as taxable income
Yes, you owe federal income tax on the interest your savings account earns. The IRS treats interest as ordinary income, taxed at your regular income tax rate. This applies to all savings accounts, money market accounts, and certificates of deposit (CDs), regardless of the bank or the interest rate.
Your bank reports this interest to the IRS on a Form 1099-INT if you earned $10 or more in interest during the tax year. You receive a copy, and the IRS receives a copy. You must report this amount on your federal tax return, even if you don't receive the form or if the amount is less than $10.
State and local income taxes also explore to savings interest in most states. A few states—including Florida, Texas, and Wyoming—have no state income tax, so residents there owe only federal tax. Others tax interest at their standard income tax rate, which varies by state.
Key Takeaways
- Banks report savings interest of $10 or more on Form 1099-INT, which you must include on your federal tax return.
- Interest is taxed at your ordinary income tax rate, not at a lower capital gains rate.
- You owe tax on interest even if the bank hasn't paid it out yet—accrued interest counts.
- Most states tax savings interest at their standard income tax rate, though a handful have no state income tax.
- The amount you owe depends on your total income and tax bracket, not on the interest amount alone.
How the IRS knows about your interest
Banks are required to send Form 1099-INT to both you and the IRS by January 31 of the following year. The form shows the interest you earned in the previous calendar year. The IRS matches this form against your tax return to check that you reported the income.
If you don't report interest that appears on a 1099-INT, the IRS will likely catch it during processing. This can trigger a notice asking you to pay the tax owed, plus penalties and interest on the unpaid amount. The penalty for underreporting income is typically 20 percent of the underpaid tax.
You must report interest even if you didn't receive a 1099-INT. If you earned less than $10, the bank may not send a form, but you still owe tax on that interest. Keep your own records of all interest earned across all accounts.
What tax rate applies to your interest
Interest is taxed as ordinary income, meaning it's taxed at the same rate as wages, salary, or other income. Your tax rate depends on your total income for the year and your filing status. If you're in the 22 percent federal tax bracket, your interest is taxed at 22 percent. If you're in the 12 percent bracket, it's taxed at 12 percent.
This is different from long-term capital gains, which are taxed at lower rates (0, 15, or 20 percent depending on income). Interest does not may have access to for those lower rates, no matter how long you hold the account.
Your state and local tax rates explore on top of federal tax. If your state has a 5 percent income tax, you owe 5 percent state tax on the interest plus your federal tax. Some cities also tax income, adding another layer.
Interest you haven't withdrawn yet still counts
You owe tax on interest in the year it's earned, not in the year you withdraw it. If your savings account earns $200 in interest during 2024, you owe tax on that $200 in 2024, even if you leave the money in the account and don't touch it until 2025.
This matters most with CDs and money market accounts, where interest accrues over time. If you buy a CD in December that earns interest but doesn't mature until February, you still report the interest on your 2024 tax return if it was credited to your account in 2024.
The only exception is interest that hasn't been credited yet. If a bank promises to pay interest on a future date and hasn't added it to your account by December 31, you don't report it until the year it's actually credited.
When multiple accounts mean multiple forms
If you have savings accounts at more than one bank, each bank sends its own Form 1099-INT. You must add up all the interest from all forms and report the total on your tax return. The IRS receives copies of all these forms, so they know your total interest income across all accounts.
Some banks consolidate interest from multiple accounts you hold with them onto a single form. Others send separate forms for each account. Either way, you're responsible for reporting the total, regardless of how many forms you receive.
If you're married and file jointly, interest in accounts held in your name is reported on your return. Interest in accounts held in your spouse's name is reported on their portion of the return. Interest in joint accounts is typically split 50/50 unless you can document a different ownership arrangement.
High-yield savings accounts and the same tax rules
High-yield savings accounts earn more interest than traditional savings accounts, but the tax treatment is identical. You still owe ordinary income tax on every dollar of interest, reported on Form 1099-INT, at your regular tax rate.
The higher interest rate means a higher tax bill. If a high-yield account earns 4.5 percent annually on a $10,000 balance, that's $450 in interest and roughly $99 in federal tax (at the 22 percent bracket), plus state tax. A traditional savings account earning 0.01 percent on the same balance earns $1 in interest and roughly 22 cents in federal tax.
This doesn't make high-yield accounts a bad choice—the higher interest still leaves you ahead. But it's important to understand that the tax is owed on the full amount earned, not on the difference between what you earned and what a traditional account would have earned.
Frequently Asked Questions
Do I have to report interest if I earned less than $10?
Yes. The bank only sends a Form 1099-INT if you earned $10 or more, but you still owe tax on any interest you earned. Keep your own records and report the amount on your return.
Can I deduct the taxes I pay on savings interest?
No. Interest income is reported as income on your return, and the tax you owe is calculated based on that income. You cannot deduct the tax itself. However, if you paid interest on a loan to earn that savings interest, that loan interest may be deductible in limited circumstances.
What if I move money between banks mid-year?
Each bank reports only the interest earned while the money was in their account. If you move $5,000 from Bank A to Bank B in June, Bank A reports interest earned January through June, and Bank B reports interest earned July through December. You report both amounts on your return.
Does a Roth IRA savings account have different tax rules?
Yes. Interest earned inside a Roth IRA is not taxed, and you don't report it on your return. The same applies to traditional IRAs, 401(k)s, and other retirement accounts. Tax is deferred or eliminated depending on the account type. Interest in regular savings accounts outside retirement accounts is always taxable.
What if the bank made an error on my 1099-INT?
Contact the bank and ask them to issue a corrected Form 1099-INT (marked as a correction). They'll send the corrected form to you and the IRS. File an amended return if you already filed, or report the correct amount if you haven't filed yet. Keep documentation of the error and the correction.