Savings account interest is taxed as ordinary income at your federal tax rate, plus any state and local income tax that applies where you live

The interest your bank pays you on a savings account is not a special category. The IRS treats it the same way it treats wages or salary — as ordinary income. That means you owe federal income tax on every dollar of interest, at whatever your tax bracket is. If you live in a state with income tax, you owe that too. If your city taxes income, you owe that as well.

The tax rate depends entirely on your total income for the year, not on the interest itself. Someone in the 12% federal tax bracket pays 12% of their interest as federal tax. Someone in the 37% bracket pays 37%. Your bank does not withhold this tax automatically — you report it yourself when you file your return, or you arrange for withholding if you want to.

The only exception is if your interest income is so small that you do not have to file a return at all. For 2024, that threshold is $14,600 for a single person under 65, but it varies by filing status and age. Even then, you may want to file to get a refund of taxes already withheld from other income.

Key Takeaways

  • Savings account interest counts as ordinary income and is taxed at your full federal tax rate, which ranges from 10% to 37% depending on your total income.
  • You must report interest income on your tax return even if the bank does not send you a form, as long as you meet the filing threshold for your situation.
  • Banks report interest of $10 or more on a Form 1099-INT, which you receive by January 31 and must match on your return.
  • State and local income taxes explore to savings interest in most states, adding another 1% to 13% depending on where you live.
  • You can arrange for your bank to withhold federal tax from your interest if you want to avoid a tax bill at filing time.

Federal tax brackets and how they explore to your interest

Your interest is taxed at your marginal tax rate — the highest bracket your total income reaches. If you earn $50,000 in wages and $500 in interest, your interest is taxed at whatever bracket $50,500 puts you in, not at a lower rate.

For 2024, the federal brackets are 10%, 12%, 22%, 24%, 32%, 35%, and 37%. A single person with $50,500 in income falls into the 22% bracket, so they owe $110 in federal tax on that $500 of interest. A married couple filing jointly with the same income would be in the 12% bracket and owe $60.

These brackets change every year. The IRS adjusts them for inflation, so the income ranges that put you in each bracket shift slightly upward annually. Your tax software or a tax professional can tell you your bracket for the year you are filing.

When banks report interest and what forms you receive

If you earn $10 or more in interest during a calendar year, your bank must send you a Form 1099-INT by January 31 of the following year. This form shows the interest amount in Box 1. You receive a copy for your records and a copy goes to the IRS.

If you earn less than $10, the bank does not have to send a form, but you still owe tax on the interest. You report it on your return based on your own records — your statements or the year-end summary your bank provides online.

The 1099-INT also reports any federal tax your bank withheld (usually in Box 4). If you arranged for withholding, that amount reduces what you owe when you file. If you did not arrange withholding, you report the full interest amount and pay the tax when you file.

State and local income tax on savings interest

Most states tax interest income the same way the federal government does — as ordinary income at your state tax rate. 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 dividends). If you live in one of those states, you owe no state tax on your interest.

In states that do tax income, the rate ranges from about 1% to 13%, depending on the state and your income level. New York City and some other cities also tax income, adding another layer. Your state return asks for interest income the same way your federal return does — you report the total from your 1099-INT or your own records.

If you move during the year, you may owe tax to two states. Some states have agreements to avoid double taxation, but you still have to file in both places. A tax professional in your state can tell you how your move affects your return.

How to report interest on your tax return

On your federal return, interest income goes on Schedule B (Interest and Ordinary Dividends) if you have more than $1,500 in interest and dividends combined, or if you received a 1099-INT. If you have less than $1,500 and no form, you can report it directly on Form 1040 line 2b without using Schedule B.

You enter the total interest from all your accounts in one place. It does not matter if the interest came from a savings account, money market account, CD, or any other source — it all goes in the same box. Then that total flows to your income calculation, and your tax is figured based on your full income for the year.

If you use tax software, it walks you through the questions and fills in the right lines. If you file by hand or with a tax professional, they will know where to put the number. The key is to have your 1099-INT forms and any statements showing interest you earned but did not receive a form for.

Withholding tax and how to arrange it

You can ask your bank to withhold federal income tax from your interest before it is deposited to your account. This is optional — the bank does not do it unless you request it. You fill out a Form W-9 or a bank form asking for your withholding preference, and the bank deducts the tax and sends it to the IRS on your behalf.

The withholding rate is usually 10% of your interest, though you can request a different rate if you want. If you have very little other income, withholding at 10% might over-withhold and give you a refund. If you have high income, 10% might under-withhold and leave you owing at tax time. You can adjust it during the year if you want.

Withholding does not change how much tax you owe — it just changes when you pay it. If you owe $150 in tax on your interest and you withhold $150, you owe nothing more at filing time. If you withhold $200, you get a $50 refund. The withholding is credited against your total tax bill for the year.

Interest from different account types and special situations

Savings accounts, money market accounts, and CDs all work the same way for tax purposes — the interest is ordinary income. High-yield savings accounts are taxed identically to regular savings accounts; the higher rate just means more interest to report and more tax to owe.

Interest from bonds, Treasury securities, and bond funds is also taxed as ordinary income at the federal level, though Treasury interest is exempt from state and local tax. Interest from municipal bonds is usually exempt from federal tax and often from state tax too, but that is a different category and not part of ordinary savings interest.

If you have a joint account, you and the account holder split the interest based on who owns what. The bank reports the full amount on a 1099-INT, but you can ask them to split it between two Social Security numbers if you each own half. Each person then reports their share on their own return.

Frequently Asked Questions

Do I have to pay tax on interest if I only earned $5?

Yes, you owe tax on any interest you earn, no matter how small. Your bank does not have to send a 1099-INT for amounts under $10, but you still report it on your return based on your statements. If your total income is below the filing threshold for your situation, you may not have to file at all — but if you do file, you report the interest.

What if I earned interest in multiple accounts at different banks?

You add up all the interest from all your accounts and report the total on your return. Each bank sends you a separate 1099-INT if the interest is $10 or more, and you report each one. The IRS matches all the forms to your return, so make sure your total matches what the banks reported.

Can I deduct anything against my interest income?

No. Interest income is added to your other income, and you pay tax on the full amount. You cannot deduct investment expenses or account fees against interest. However, if you paid interest on a loan to buy investments, you might be able to deduct that investment interest — but that is a separate calculation and usually only helps if you have investment income to offset.

What happens if I move to a different state during the year?

You owe tax to both states for the part of the year you lived in each one. You file a part-year resident return in each state, reporting only the income earned while you lived there. Some states have reciprocal agreements that reduce or eliminate tax, but you still have to file. A tax professional in your new state can walk you through the process.

Is there a way to avoid paying tax on savings interest?

Not legally. Interest is income and is taxable. You can reduce the amount of interest you earn by keeping money in lower-yield accounts, but that does not reduce your tax — it just reduces your income. The only way to have tax-free interest is to use accounts specifically designed for that, like Roth IRAs or 529 education savings plans, which have their own rules and limits.