Interest on savings accounts is taxable income, but the account itself is not
You do not pay tax on the money sitting in your savings account. You pay tax on the interest that account earns. The interest is ordinary income — taxed the same way as wages or salary — and you report it on your federal tax return every year you earn it.
The bank or credit union holding your account will send you a form called a 1099-INT each January, listing all the interest you earned in the previous calendar year. You use that form to report the income when you file taxes. If you earned less than $10 in interest from a single institution, the bank may not send the form, but you still owe tax on that interest.
The tax rate depends on your overall income and tax bracket. Someone in the 22% federal bracket pays 22 cents in federal tax for every dollar of interest earned. State and local income tax may also explore, depending on where you live.
Key Takeaways
- Interest earned in a savings account is taxable income reported on your federal tax return each year.
- Banks send a 1099-INT form in January showing interest earned in the previous year, even if the amount is small.
- Interest is taxed as ordinary income at your marginal tax rate, which varies by income level and state.
- High-yield savings accounts earn more interest, which means more tax owed, but the after-tax return is still usually higher than traditional savings accounts.
- You can reduce taxable interest by holding savings in tax-advantaged accounts like IRAs or 529 plans, depending on the purpose of the money.
How the 1099-INT form works and what it includes
The 1099-INT arrives by mail or email in January and covers all interest earned during the previous calendar year. It shows the total interest from that institution only — if you have savings accounts at multiple banks, you will receive a separate 1099-INT from each one.
Box 1 on the form shows the interest income. Boxes 2 through 5 cover less common types of interest (U.S. savings bonds, federal income tax refunds, and so on). Most savings account holders only need to look at Box 1.
You must report this interest on your tax return even if you do not receive a 1099-INT. The IRS receives a copy of every 1099-INT the bank files, so if you omit the interest and the bank reported it, the IRS will notice the discrepancy.
When interest is taxed and how it affects your return
Interest is taxed in the year you earn it, not when you withdraw the money. If you earned $500 in interest during 2024, you owe tax on that $500 in 2024, even if you leave the money in the account and do not touch it.
The interest is added to your other income — wages, self-employment income, investment gains — and taxed at your marginal rate. If you earned $60,000 in wages and $500 in interest, your taxable income is $60,500. The interest pushes you slightly higher in the tax bracket, so you may pay a bit more in tax overall.
For most people, the tax on savings interest is small because savings account rates are low. A $10,000 balance earning 4% annually generates $400 in interest. In the 22% bracket, that costs $88 in federal tax. But if you have a large balance or live in a state with income tax, the amount grows quickly.
High-yield savings accounts and the tax trade-off
High-yield savings accounts pay 4% to 5% annually, compared to 0.01% at many traditional banks. The higher rate means more interest earned — and more tax owed. A $50,000 balance at 5% earns $2,500 in interest, which costs roughly $550 in federal tax at the 22% rate.
Even after taxes, the high-yield account usually comes out ahead. The same $50,000 at 0.01% earns only $5 in interest, costing about $1 in tax. The high-yield account nets you roughly $1,950 more per year, even after paying the extra tax.
The trade-off matters most if you are in a high tax bracket or live in a state with significant income tax. Someone in the 37% federal bracket plus 10% state tax pays 47 cents on every dollar of interest. The math still favors high-yield accounts, but the after-tax gap narrows.
Tax-advantaged accounts that shield savings interest
Certain accounts let you earn interest without paying tax on it, at least temporarily or permanently. A traditional IRA or 401(k) grows tax-free until you withdraw the money in retirement. A Roth IRA grows tax-free and you never pay tax on the interest, as long as you follow the withdrawal rules.
A 529 college savings plan lets you earn interest tax-free if you use the money for may have access to education expenses. A Health Savings Account (HSA) works the same way for medical costs.
These accounts have contribution limits and rules about when you can withdraw the money. But if your savings fit the purpose — retirement, education, medical — moving money into one of these accounts can eliminate the tax on interest entirely.
State and local taxes on savings interest
Most states tax interest income the same way the federal government does. You report it as ordinary income on your state tax return, and it is taxed at your state rate. A few states — including Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming — do not have a state income tax at all, so residents owe no state tax on interest.
Some states offer small breaks. Illinois and Mississippi exempt interest from savings accounts and money market accounts from state tax, though you still owe federal tax. New York allows a small deduction for interest income if your income is below a certain threshold.
If you live in a high-tax state and have a large savings balance, moving to a no-income-tax state or opening an account in one is not practical. But it is worth knowing that your total tax bill includes both federal and state, and the state portion varies significantly by location.
Reporting interest if you did not receive a 1099-INT
If you earned less than $10 in interest from a single bank, the bank is not required to send a 1099-INT. But you still owe tax on that interest. You can find the amount by logging into your online banking or calling the bank and asking for the interest earned in the previous year.
Report the interest on Schedule 1 (Form 1040), line 8, under "Interest." If you have multiple small amounts from different banks, add them together and report the total. The IRS does not receive a copy of unreported small amounts, but omitting income — even small amounts — is technically tax evasion.
Some tax software will prompt you to enter interest income even if you do not have a 1099-INT. If yours does not, you can enter it manually on the interest line of your return.
Frequently Asked Questions
Do I owe tax on savings account interest if I do not withdraw the money?
Yes. Interest is taxed in the year you earn it, whether you withdraw it or leave it in the account. The IRS taxes the interest as soon as it is credited to your account, not when you spend or move the money.
What if my savings account earned less than $10 in interest?
You still owe tax on it, even though the bank does not send a 1099-INT. Check your account statement or call the bank to find the exact amount, then report it on your tax return. Many people miss these small amounts, but the IRS expects them to be reported.
Can I deduct savings account interest as a loss?
No. Interest income cannot be deducted. You can only deduct certain types of interest you pay — mortgage interest, student loan interest — not interest you earn. Savings interest is always taxable income with no offsetting deduction.
Does moving money between savings accounts change how much tax I owe?
No. Moving money from one account to another is not a taxable event. Only the interest earned is taxable. You can move your balance to a higher-paying account without any tax consequence — you just owe tax on whatever interest the new account earns going forward.
Is interest from a money market account taxed the same way as savings account interest?
Yes. Money market accounts, savings accounts, and certificates of deposit all report interest on a 1099-INT and are taxed as ordinary income. The account type does not matter — only the interest earned.