You owe federal income tax on the interest your savings account earns
Any interest your bank pays you counts as income to the IRS, just like wages or a paycheck. If your savings account earned $10 in interest last year, that $10 is taxable income. The bank does not withhold taxes automatically — you report it yourself when you file your tax return.
The amount of tax you actually owe depends on your total income and your tax bracket. Someone earning $30,000 a year pays a lower percentage on that interest than someone earning $100,000. The interest itself is taxed at your ordinary income tax rate, not at a special lower rate.
Most people with savings accounts earn small amounts of interest — sometimes just a few dollars a year — so the tax bill is small. But the IRS still expects you to report it, and your bank will report it to the IRS too.
Key Takeaways
- Your bank reports all interest earned to the IRS on a form called a 1099-INT, and sends you a copy.
- You must report this interest income on your federal tax return, even if the amount is very small.
- The tax you owe is based on your personal tax bracket, not a flat rate on the interest.
- Some states also tax interest income, while others do not — this depends on where you live.
- High-yield savings accounts earn more interest, which means a larger tax bill, but the after-tax return is usually still better than traditional savings accounts.
How your bank reports interest to the IRS
In January or early February each year, your bank sends you a 1099-INT form if you earned $10 or more in interest during the previous year. This form lists the total interest paid to your account. The bank sends an identical copy to the IRS.
You do not have to do anything when you receive the 1099-INT — just keep it with your tax documents. When you file your tax return, you enter the interest amount from this form into your return. If you use tax software, it usually has a place to enter this number. If you file by hand or with a tax preparer, give them the 1099-INT.
If you earned less than $10 in interest, the bank may not send you a 1099-INT, but you still owe tax on that interest if you file a return. You would need to contact your bank to find out the exact amount.
What tax rate applies to your interest income
Interest income is taxed at your ordinary income tax rate, which is the same rate that applies to your wages or salary. The federal government has seven tax brackets ranging from 10% to 37%, depending on how much total income you earn. Your interest gets added to your other income, and the combined total determines your bracket.
For example, if you earn $35,000 in wages and $50 in savings interest, the IRS treats you as earning $35,050. That $50 is taxed at whatever rate applies to your income level, not at a special interest rate.
The tax brackets change each year, and they are different depending on whether you file as single, married filing jointly, head of household, or another status. The IRS publishes the current brackets on its website each January.
State taxes on savings interest
Some states tax interest income, and some do not. Nine states have no income tax at all: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, Wyoming, and New Hampshire (which taxes only interest and dividend income, but many people are exempt). If you live in one of these states, you owe no state tax on your savings interest.
If you live in any other state, you almost certainly owe state income tax on your interest, at your state's tax rate. State rates vary widely — some states tax interest at the same rate as wages, while others have a flat rate or a different bracket system. Your state tax return will ask you to report interest income the same way your federal return does.
If you live in one state but your savings account is in another state, you owe tax to the state where you live, not where the bank is located. Your state of residence is where you claim residency for tax purposes.
Why high-yield savings accounts still make sense despite taxes
A high-yield savings account might earn 4% or 5% interest, while a traditional savings account earns 0.01%. That sounds like a huge difference, but you pay tax on the higher interest, so the after-tax return is smaller. Many people wonder whether the tax bill makes high-yield accounts not worth it.
In most cases, high-yield accounts still come out ahead. If you earn $500 in interest at 5% and owe 22% federal tax on it, you pay $110 in tax and keep $390. If you had kept the same money in a traditional account earning 0.01%, you would have earned $1 and owed almost no tax, keeping roughly $1. The high-yield account leaves you with far more money even after taxes.
The only exception is if you have a very large amount saved and live in a high-tax state — then the combined federal and state tax bill can be substantial. But even then, earning more interest and paying tax on it usually beats earning almost nothing.
How to report interest on your tax return
If you use tax software like TurboTax, H&R Block, or TaxAct, the software will ask you about interest income. You enter the amount from your 1099-INT form, and the software automatically adds it to your income and calculates the tax.
If you file a paper return or use a tax preparer, give them your 1099-INT forms. The interest goes on Schedule B (Interest and Ordinary Dividends) if you have more than $1,500 in interest, or directly on Form 1040 if you have less. Your tax preparer or the paper instructions will show you where.
You must report all interest income, even if the bank did not send you a 1099-INT because the amount was under $10. If you are unsure of the exact amount, contact your bank and ask them to calculate it for you.
What happens if you do not report interest income
The IRS receives a copy of every 1099-INT your bank sends you. If you do not report the interest on your return, the IRS will notice the discrepancy when it compares your return to the 1099-INT. This can trigger a notice asking you to explain the difference.
If the amount is small and you straightforward forgot, you can file an amended return to correct it. The penalty is usually small — mainly interest on the unpaid tax. If the IRS believes you intentionally hid income, the penalties are much larger and can include criminal charges, though this is rare for small amounts.
The simplest approach is to report all interest income when you file. The amount is usually small enough that it does not significantly change your tax bill, and reporting it keeps you in compliance with the law.
Frequently Asked Questions
Do I have to report interest if I earned less than $10?
Yes, you must report all interest income on your tax return, even if it is less than $10 and the bank did not send a 1099-INT. Contact your bank to find the exact amount, then report it on your return.
Can I deduct savings account fees from the interest I report?
No. You report the full interest amount the bank paid you. Fees are a separate issue and are not deductible against interest income on your personal tax return.
What if I have interest from multiple banks?
You receive a separate 1099-INT from each bank. Add up all the interest amounts and report the total on your tax return. Tax software will usually let you enter multiple 1099-INT forms.
Does interest from a money market account get taxed the same way?
Yes. Money market accounts, certificates of deposit (CDs), and other savings products all report interest on a 1099-INT and are taxed as ordinary income at your tax bracket rate.
If I move money between accounts, do I owe tax on the transfer?
No. Moving money between your own accounts is not a taxable event. You only owe tax on interest the bank pays you, not on transfers of your own money.