The IRS treats savings account interest as ordinary income
Interest you earn on a savings account is taxed as ordinary income — the same way the IRS taxes your wages or salary. This means the interest gets added to your total income for the year, and you pay tax on it at whatever rate applies to your overall earnings. There is no special lower rate for interest, and you cannot avoid the tax by leaving the money in the account.
Your bank will track how much interest you earned and report it to both you and the IRS on a form called a 1099-INT. You receive this form by January 31 of the year after you earned the interest. When you file your tax return, you add that interest amount to your other income and calculate what you owe based on your tax bracket.
The amount of tax you actually pay depends on your total income for the year and your filing status. Someone earning $30,000 a year pays tax on savings interest at a lower rate than someone earning $150,000. The interest itself is always taxable — it is just the rate that changes based on your situation.
Key Takeaways
- Savings account interest counts as ordinary income and is taxed at your regular income tax rate, not a special lower rate.
- Your bank sends you a 1099-INT form by January 31 showing how much interest you earned, and you report this on your tax return.
- You owe tax on interest even if you do not withdraw it — the tax is based on what you earned, not what you took out.
- If you earned less than $10 in interest during the year, your bank may not send a 1099-INT, but you still report the interest if you file a return.
When you have to report interest to the IRS
You must report savings account interest on your tax return if you file one, regardless of the amount. However, your bank only sends you a 1099-INT form if you earned $10 or more in interest during the calendar year. If you earned less than $10, the bank does not issue the form, but you still need to report the interest yourself when you file.
The $10 threshold is a reporting requirement for the bank, not a threshold for what you owe tax on. Even $1 in interest is technically taxable income. In practice, if your total income is low enough that you do not have to file a return, you would not owe tax on small amounts of interest. But if you do file a return, you report whatever interest you earned.
Keep your own records of interest earned, especially if it falls below $10. Your bank statement will show deposits labeled as interest, and you can add these up yourself if you do not receive a 1099-INT.
How the tax is calculated based on your income level
The United States uses a progressive tax system, which means your tax rate increases as your total income increases. Interest is added to your other income — wages, self-employment earnings, rental income, and so on — and then taxed according to the bracket your total income falls into.
For example, if you earned $35,000 in wages and $200 in savings interest, your taxable income is $35,200. That $200 is taxed at whatever rate applies to someone in your income bracket and filing status. If you are single and that $35,200 puts you in the 12% bracket, the interest is taxed at 12%, not at a lower rate.
The IRS publishes tax brackets each year, and they change slightly to account for inflation. Your filing status — single, married filing jointly, head of household — also affects which bracket you fall into. A married couple filing jointly can earn more income before reaching a higher bracket than a single filer can.
What happens if you earn interest in multiple accounts
If you have savings accounts at more than one bank, or a savings account plus a money market account or certificate of deposit, you add up all the interest from all accounts. Each bank reports its own interest on a separate 1099-INT, and you report the total on your tax return.
The IRS does not care that the interest came from multiple places — it all counts as ordinary income. If Bank A paid you $150 in interest and Bank B paid you $200, you report $350 total. You will receive two 1099-INT forms (one from each bank), but you combine the amounts when you file.
Keep all your 1099-INT forms in one place when you prepare your return. If a bank sends you a form but you believe the amount is wrong, contact the bank to request a corrected form before you file.
State and local taxes on savings interest
In addition to federal income tax, you may owe state or local income tax on savings interest, depending on where you live. Most states that have an income tax treat interest the same way the federal government does — as ordinary income taxed at your regular rate.
A few states do not have an income tax at all, so residents pay no state tax on interest. These include Florida, Texas, Wyoming, Alaska, Nevada, South Dakota, Tennessee, and Washington. If you live in one of these states, you only owe federal tax on your interest.
Some states offer tax breaks for interest earned on certain types of accounts, such as accounts held by seniors or people with disabilities, but these are uncommon. Check your state's tax authority website or speak with a tax preparer if you think you might may have access to for a special situation.
How to report interest on your tax return
When you file your federal return, you report interest income on Schedule 1 (Form 1040), which is where you list all income that is not wages. You enter the total amount of interest you earned, and this gets added to your adjusted gross income. If you use tax software, it will walk you through entering this information, and the software will calculate the tax impact automatically.
If you received a 1099-INT, the information should match what you report. If there is a discrepancy, the IRS will notice because the bank also sent them a copy of the form. It is important to report the correct amount, even if it seems like a small difference.
If you did not receive a 1099-INT because you earned less than $10, you still report the interest if you file a return. Write the amount on Schedule 1 and include a note explaining that no 1099-INT was issued. This protects you if the IRS questions the omission later.
Interest earned in retirement accounts works differently
Interest earned inside a retirement account — such as a traditional IRA, Roth IRA, or 401(k) — is not taxed in the year you earn it. Instead, the interest compounds tax-free inside the account. You only pay tax when you withdraw the money, and the tax treatment depends on the type of account.
With a traditional IRA or 401(k), you pay income tax on withdrawals at your regular rate. With a Roth IRA, may have access to withdrawals are tax-free. This is one reason retirement accounts are valuable — the interest can grow without being reduced by annual taxes.
This article focuses on interest in regular savings accounts, which are not retirement accounts. If you have questions about how interest in retirement accounts is taxed, speak with a tax professional or contact the financial institution holding the account.
Frequently Asked Questions
Do I have to pay taxes on interest if I do not withdraw the money?
Yes. You owe tax on interest in the year you earn it, whether you withdraw it or leave it in the account. The IRS taxes you on the interest amount, not on the money you take out. If you leave the interest in the account, it becomes part of your balance and earns interest itself next year.
What if my bank sent me a 1099-INT with the wrong amount?
Contact your bank when ready and ask them to issue a corrected form, called a 1099-INT correction. The bank will send the corrected form to you and the IRS. Do not file your tax return until you have the correct form, or file an amended return if you already filed.
Can I deduct the taxes I pay on savings interest?
No. Interest income is added to your taxable income, but you cannot deduct the tax you pay on it. You can only deduct certain types of interest you pay, such as mortgage interest or student loan interest — not interest you earn.
Is interest from a high-yield savings account taxed differently?
No. A high-yield savings account earns more interest than a regular savings account, but the interest is still taxed as ordinary income at your regular rate. The higher the interest rate, the more you owe in taxes, but the tax treatment is the same.
What if I earned interest but did not receive a 1099-INT?
If you earned $10 or more, contact your bank — they may have sent it to an old address or there may be a processing delay. If you earned less than $10, the bank is not required to send a form, but you still report the interest on your return if you file one.