Yes, you pay federal income tax on the interest your savings account earns, but not on the money itself
The money you deposit into a savings account is yours — you do not pay tax on it when you put it in or when you take it out. But the interest the bank pays you for keeping money there is income, and the IRS treats it the same way it treats wages or other earnings. You owe federal income tax on that interest at your regular tax rate.
The amount of tax depends on how much interest you earned and what your total income was that year. A savings account earning $50 in interest will not trigger a tax bill by itself, but it counts as income when you file your return. Some states also tax savings interest, though the rules vary by where you live.
The bank reports what you earned to both you and the IRS, so the IRS already knows about it before you file. That is why reporting it correctly matters — the IRS matches what you report against what the bank reported.
Key Takeaways
- You pay federal income tax on savings account interest at your regular tax rate, but not on the money you deposited.
- Banks send you a Form 1099-INT each January showing how much interest you earned the previous year, and they send a copy to the IRS.
- You must report all interest income on your federal tax return, even if the amount is small or the bank did not send a form.
- Some states tax savings interest and some do not, depending on where you live and the type of account.
- If you earned less than the threshold amount your bank uses, you may not receive a 1099-INT form, but you still owe tax on the interest.
How the IRS finds out about your savings interest
Every January, your bank sends you a Form 1099-INT showing how much interest you earned in the previous calendar year. The bank also sends a copy to the IRS. This form lists your name, your Social Security number, and the exact dollar amount of interest paid to your account.
The IRS uses this form to check that you reported the interest on your tax return. If you report a different amount than what the bank reported, or if you do not report it at all, the IRS will notice. This mismatch can trigger a letter asking you to explain the difference or pay additional tax.
Even if your bank does not send you a 1099-INT form — which can happen if you earned a very small amount of interest — you still owe tax on whatever interest you earned. You are responsible for reporting it whether or not the bank documents it.
When you might not receive a 1099-INT form
Banks are required to send a 1099-INT form only if you earned at least $10 in interest during the year. If your savings account earned $8 in interest, your bank will not send you a form. But you still owe tax on that $8.
This threshold of $10 has not changed in decades, so it catches fewer accounts now than it did when the rule was written. Many savings accounts earning very low interest rates will fall below this amount. Keep your own records of any interest you earned, even if no form arrives.
If you are unsure how much interest you earned, log into your online banking or call your bank and ask them to tell you the total interest paid to your account for the year. They can give you this number even if they did not send a form.
How to report savings interest on your tax return
When you file your federal tax return, you report interest income on Schedule B (if you use the full form) or directly on your return (if you use the short form). You list the name of each bank where you had an account and the amount of interest you earned.
If you have only one savings account and earned less than $1,500 in interest, you can report the total directly on your main return form without using Schedule B. If you have multiple accounts or earned more than $1,500, you fill out Schedule B and attach it to your return.
The interest you report gets added to your other income for the year. It is taxed at your regular income tax rate — the same rate that applies to your wages or salary. If you earned $50,000 in wages and $200 in savings interest, you owe tax on $50,200 of income.
State taxes on savings interest
Most states that have an income tax also tax savings interest the same way the federal government does. You report it on your state return using a similar process. A few states do not tax interest income at all, and some have special rules for certain types of accounts or savers.
If you live in a state with income tax, check your state's tax authority website or ask a tax preparer whether savings interest is taxed in your state. The rules can be specific — for example, some states exempt interest earned by people over a certain age, or interest in certain retirement accounts.
States without income tax (such as Florida, Texas, and Wyoming) do not tax savings interest. If you moved during the year, you may owe tax to both your old state and your new state for the portion of the year you lived in each, so keep track of when you moved.
High-yield savings accounts and interest taxes
High-yield savings accounts pay much more interest than traditional savings accounts — sometimes 4% or 5% per year instead of 0.01%. This means you will owe more tax on the interest, but the tax works the same way. The bank sends a 1099-INT, and you report it on your return.
If you have $10,000 in a high-yield account earning 5%, you will earn about $500 in interest over a year. You owe tax on that $500 at your regular rate. If your tax rate is 22%, you will owe about $110 in federal tax on that interest. This is still worth it — you are earning $500 that you would not have earned in a regular account — but it is important to know the tax bill is coming.
Some people move money to high-yield accounts specifically because the interest rate is higher, but then are surprised by the tax bill. Plan for it by setting aside some of the interest you earn, or by understanding that your tax bill will be higher that year.
What happens if you do not report savings interest
If you do not report interest income on your tax return, the IRS will eventually notice because the bank reported it. The IRS will send you a letter asking you to pay the tax you owe plus interest on the unpaid amount. You may also face a penalty for not reporting the income.
The penalty is usually 20% of the unpaid tax, though it can be higher if the IRS determines the error was intentional. The interest on unpaid tax compounds daily, so the longer you wait to pay, the more you owe. It is much cheaper to report the interest when you file than to deal with the IRS later.
If you made an honest mistake and did not report a small amount of interest, you can file an amended return to correct it. The sooner you do this, the less interest and penalty you will owe.
Frequently Asked Questions
Do I have to report interest if I only earned a few dollars?
Yes. The IRS requires you to report all interest income, no matter how small. Even if your bank did not send a 1099-INT form because you earned less than $10, you still owe tax on whatever interest you earned and must report it on your return.
What if I have savings accounts at multiple banks?
List each bank and the interest from each account on Schedule B of your tax return. You will receive a separate 1099-INT from each bank (if you earned at least $10 at that bank), and you report the total interest from all accounts combined on your return.
Does a joint savings account change how I report interest?
If the account is jointly owned, the bank will split the interest between the owners on the 1099-INT forms it sends. Each owner reports their share on their own tax return. Make sure the Social Security numbers on the account are correct so the forms go to the right people.
Can I deduct savings account fees from the interest I report?
No. You report the full interest amount the bank paid you, not the net amount after fees. Savings account fees are not deductible on your personal tax return, though they do reduce the actual interest you keep.
What if the bank made a mistake on my 1099-INT form?
Contact the bank and ask them to issue a corrected form. If they confirm the amount was wrong, they will send you a corrected 1099-INT and send a corrected copy to the IRS. Report the corrected amount on your tax return.