Interest from your savings account counts as income the IRS taxes

Yes, you owe federal income tax on the interest your savings account earns. The bank treats that interest the same way it treats wages or other income — it's money you received, so it's taxable. The amount you owe depends on how much interest you earned and what tax bracket you fall into.

Your bank will send you a form called a 1099-INT (Interest Income) each January if you earned $10 or more in interest during the previous year. You report that number on your tax return, and the IRS adds it to your other income to calculate what you owe. Some states also tax interest income, though a few do not.

The good news: the interest rate on most savings accounts is low enough that many people owe little or no tax on it. The harder part is remembering to report it, because unlike a paycheck, nobody automatically withholds tax from your interest.

Key Takeaways

  • Interest earned in a savings account is taxable income at both the federal and (usually) state level, reported on a 1099-INT form.
  • You only receive a 1099-INT if you earned $10 or more in interest during the year, but you still owe tax on smaller amounts.
  • The tax you owe on interest depends on your total income and tax bracket, not on a flat rate.
  • High-yield savings accounts earn more interest, which means you owe more tax — but you still come out ahead with the higher rate.
  • Some retirement accounts like IRAs and 401(k)s shelter interest from tax, but regular savings accounts do not.

How the IRS knows about your interest

Banks report interest to the IRS automatically. When you open a savings account, you provide your Social Security number or tax ID. At the end of each year, the bank calculates how much interest you earned and files a 1099-INT with the IRS showing your name, your ID number, and the amount.

The IRS gets a copy of that same form. When you file your tax return, you report the interest income. The IRS matches what you reported to what the bank reported. If the numbers don't match, you'll hear about it.

This is why it matters even if you earn less than $10. The bank doesn't send you a 1099-INT for amounts under $10, but you're still supposed to report that interest on your return. The IRS won't know about it unless the bank reported it, but reporting it correctly keeps your records clean.

What tax rate applies to your interest

Interest is taxed as ordinary income, meaning it's taxed at whatever rate applies to your total income for the year. If you earn $35,000 in wages and $500 in interest, the IRS treats that $500 the same as if it were wages — it gets added to your $35,000, and you pay tax on the combined $35,500.

Your tax rate depends on your filing status and total income. For 2024, a single person with $35,500 in income pays a different rate than someone with $100,000. The IRS publishes tax brackets each year, and your bank or tax software can help you figure out which bracket you fall into.

The key point: there's no special "interest tax rate." You pay whatever your normal income tax rate is. If you're in the 12% bracket, you pay roughly 12% of your interest in federal tax. If you're in the 22% bracket, you pay roughly 22%.

State taxes on savings interest

Most states tax interest income the same way the federal government does — as ordinary income added to your other earnings. A few states do not tax interest at all. Some states exempt interest earned on certain types of accounts or for certain people (like retirees).

You can find your state's rules by searching "[your state] income tax on interest" or by contacting your state's revenue or tax department. If you live in a state with income tax, you'll report the same 1099-INT amount on your state return that you report to the IRS.

Why high-yield savings accounts still make sense despite taxes

A high-yield savings account might earn 4% or 5% interest, while a regular savings account earns 0.01%. That sounds like you'll owe a lot more tax on the high-yield account. But you still come out far ahead.

Say you have $10,000 in savings. In a regular account earning 0.01%, you make $1 in interest and owe almost no tax. In a high-yield account earning 4.5%, you make $450 in interest. If you're in the 22% tax bracket, you owe about $99 in tax, leaving you with $351 in actual gain. You're still $350 ahead of the regular account, even after paying tax.

The higher interest rate more than makes up for the tax you owe. The only time to worry about tax is if you're trying to decide between two high-yield accounts — in that case, the tax impact is small enough that other factors (like customer service or account features) matter more.

Tax-sheltered accounts where interest is not taxed

Certain retirement accounts let your interest grow without owing tax each year. The most common are traditional IRAs and 401(k) plans. Money you put into these accounts earns interest tax-free until you withdraw it in retirement. At that point, you pay tax on the whole amount you withdraw.

Roth IRAs and Roth 401(k)s work differently — you pay tax on the money going in, but the interest and growth are never taxed, even when you withdraw it. For someone just starting out, a Roth account can be a powerful way to build savings without worrying about tax on the interest.

These accounts have limits on how much you can contribute each year, and rules about when you can withdraw the money. But if you're saving for retirement, using one of these accounts instead of a regular savings account means you keep more of your interest.

What to do when you receive your 1099-INT

Your bank will mail or email you a 1099-INT by January 31 if you earned $10 or more in interest during the previous year. You'll get two copies — one to keep for your records and one to send with your tax return (or to give to a tax preparer).

When you file your tax return, you report the amount from box 1 of the 1099-INT on Schedule B (if you earned interest from multiple sources) or directly on your Form 1040 (if you only have one source). Tax software will walk you through this step by step.

Keep your 1099-INT with your tax records for at least three years. If the IRS ever questions your return, you'll need to show that you reported the interest correctly.

Frequently Asked Questions

Do I have to report interest if I earned less than $10?

Yes. The $10 threshold only determines whether the bank sends you a 1099-INT form. You're still required to report all interest income on your tax return, even if it's $2 or $5. However, if you earned less than $10 from all sources combined, you may not owe any tax depending on your total income and filing status.

What if my bank didn't send me a 1099-INT but I earned interest?

Contact your bank and ask them to send one. If they confirm you earned less than $10, you still report the interest on your return — just write in the amount yourself. Keep your bank statements as proof in case the IRS asks.

Can I deduct any expenses related to my savings account?

No. Interest income is taxed as-is; you can't reduce it by claiming account fees or other costs. However, if you paid investment advisory fees or fees to a tax preparer to help with investment income, those might be deductible under different rules — ask a tax professional.

Is interest from a money market account taxed the same way?

Yes. Money market accounts, savings accounts, and certificates of deposit (CDs) all earn interest that's taxed as ordinary income. You'll receive a 1099-INT for any of these accounts if you earn $10 or more.

What happens if I move money between banks — do I owe tax on that?

No. Moving money from one account to another is not income. You only owe tax on the interest the money earns, not on the money itself.