Interest from your savings account counts as income to the IRS
Yes, you owe federal income tax on the interest your savings account earns. The IRS treats this interest as taxable income, the same way it treats wages from a job. If your bank paid you $50 in interest last year, that $50 is income you report on your tax return.
The amount you owe depends on your total income and your tax bracket — the higher your income, the higher the percentage of tax you pay. But even small amounts of interest are technically taxable, though you may not owe anything if your total income is below the filing threshold for your situation.
Your bank will send you a form called a 1099-INT (or sometimes a 1099-OID) if you earned $10 or more in interest during the year. This form lists exactly how much interest you earned, and you use it to fill out your tax return. If you earned less than $10, the bank does not have to send the form, but you still owe tax on that interest if you file a return.
Key Takeaways
- Interest earned in savings accounts is taxable income and must be reported to the IRS on your tax return.
- Your bank sends a 1099-INT form if you earned $10 or more in interest during the year, showing the exact amount.
- The tax rate you pay on interest depends on your total income and tax bracket, not on the interest amount alone.
- You report savings account interest on your federal return; some states also tax interest income, depending on where you live.
- High-yield savings accounts earn more interest, which means more taxable income — but the interest is still usually worth it compared to regular savings accounts.
How the IRS knows about your interest
Banks report interest to both you and the IRS automatically. By January 31 each year, your bank mails or emails you a 1099-INT form showing all the interest you earned in the previous calendar year. The bank sends a copy to the IRS at the same time, so the IRS knows what you earned.
This is why you cannot straightforward ignore small amounts of interest. Even if you do not receive a 1099-INT because you earned less than $10, the IRS still expects you to report any interest you received. If you file a tax return, you must include all interest income, no matter how small.
If the amount on the 1099-INT your bank sent you does not match what you report on your return, the IRS will notice the discrepancy. This is one of the easiest things for the IRS to catch because the numbers come directly from the bank.
What tax rate applies to your interest
Interest is taxed as ordinary income, which means it is taxed at the same rate as your wages or salary. If you earn $40,000 a year and your savings account earns $500 in interest, the IRS treats that $500 as if it were part of your $40,000 income.
Your tax rate depends on your tax bracket, which is determined by your total income. In 2024, for example, a single person with income between roughly $11,600 and $47,150 pays 12% federal tax on each additional dollar earned. Someone with income above $191,950 pays 32% on additional income. Interest you earn falls into whichever bracket your total income reaches.
This means the tax you owe on interest is not a flat percentage — it depends on how much other income you have. A person earning $20,000 a year pays less tax on $100 in interest than a person earning $100,000 a year, because they are in different tax brackets.
State taxes on savings interest
Most states also tax interest income, though a few do not. States that do tax interest usually treat it the same way the federal government does — as ordinary income taxed at your state tax rate.
A handful of states — including Florida, Texas, Tennessee, and Wyoming — do not tax interest income at all. If you live in one of these states, you owe federal tax on your savings interest but no state tax. If you live elsewhere, check your state's tax rules or ask a tax preparer, because state rates and rules vary.
Some states offer small breaks for interest earned by people over a certain age, usually 65 or older. These breaks are uncommon and usually modest, but worth checking if that applies to you.
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%. This means more interest income and more tax owed — but you still come out ahead.
Say you have $10,000 in savings and you are in the 22% federal tax bracket. In a regular savings account earning 0.01%, you earn $1 in interest and owe about $0.22 in tax. In a high-yield account earning 4.5%, you earn $450 in interest and owe about $99 in tax. You keep $351 extra, even after taxes. The higher interest rate more than makes up for the additional tax.
The only time a high-yield account might not make sense is if you are in a very high tax bracket and the interest is substantial enough to push you into a higher bracket altogether. This is rare and usually only happens with very large balances or very high account rates.
How to report interest on your tax return
When you file your federal return, you report interest income on Schedule B (if you have more than $1,500 in interest) or directly on Form 1040 (if you have $1,500 or less). You list the name of each bank and the amount of interest from the 1099-INT form.
If you use tax software like TurboTax, H&R Block, or TaxAct, you can enter the information from your 1099-INT directly into the program, and it calculates where the interest goes on your return. If you file by hand or with a tax preparer, bring all your 1099-INT forms with you.
For state taxes, follow your state's rules. Most states have a similar form or section on their return where you report interest income. Some states accept the federal return as proof; others require a separate state return.
What happens if you do not report interest income
If you do not report interest income on your return and the IRS catches it, you will owe the tax you should have paid plus penalties and interest on the unpaid amount. The penalty is usually 20% of the unpaid tax, and interest accrues daily.
The IRS catches unreported interest easily because banks report it directly. If there is a mismatch between what the bank reported and what you reported, the IRS will send you a notice. It is much simpler to report the interest correctly the first time.
If you realize you missed interest income in a previous year, you can file an amended return (Form 1040-X) to correct it. This is better than waiting for the IRS to contact you, because it shows good faith and may reduce penalties.
Frequently Asked Questions
Do I have to report interest if I earned less than $10?
Yes. The $10 threshold only determines whether your bank has to send you a 1099-INT form. You still owe tax on any interest you earned, even $1 or $5, if you file a tax return. Report it on your return based on your bank statements or records.
Can I deduct savings account fees from my interest income?
No. You report the full interest amount on your return; you cannot subtract fees. However, if you paid investment-related fees (which is rare for savings accounts), you might be able to deduct them as miscellaneous deductions, though rules on this have changed in recent years. Ask a tax preparer about your specific situation.
What if I moved money between banks during the year?
Each bank reports only the interest it paid you. If you had accounts at three different banks, you will receive three separate 1099-INT forms. Add up all the interest from all the forms and report the total on your return.
Does interest from a joint savings account get split between owners for tax purposes?
Not automatically. The bank reports the full interest amount on a 1099-INT. If the account is truly joint and you and the other owner split the interest equally, you each report half on your own return. Keep records showing how you split it in case the IRS asks. If only one person owns the account, that person reports all the interest.
Is interest from a money market account taxed the same way?
Yes. Money market accounts, certificates of deposit (CDs), and other savings products all earn interest that is taxed as ordinary income. You will receive a 1099-INT for each account that earns $10 or more in interest, and you report all of it on your return the same way.