The IRS taxes all savings account interest as ordinary income

Every dollar of interest your savings account earns is taxable income. There is no threshold—not $1, not $100. The IRS treats interest the same way it treats wages: you report it, you pay tax on it. The tax rate depends on your total income and tax bracket, not on the interest amount itself.

Your bank will send you a Form 1099-INT if your interest earned $10 or more in a calendar year. If you earned less than $10, the bank does not have to send the form, but you still owe tax on that interest. You report it on your tax return anyway.

The interest is taxed in the year you earn it, not when you withdraw the money. If your account earned $50 in interest in 2024, you report that $50 on your 2024 tax return, even if you do not touch the account until 2025.

Key Takeaways

  • All savings account interest is taxable income, regardless of the amount, and you report it on your federal tax return.
  • Your bank sends Form 1099-INT only if interest reaches $10 or more in a year, but you must report smaller amounts yourself.
  • Interest is taxed in the year you earn it, based on your tax bracket and total income for that year.
  • High-yield savings accounts earn more interest and therefore create a larger tax bill, even though the interest rate itself is not taxed differently.
  • Some accounts like Roth IRAs and 529 plans have tax-free or tax-deferred interest, but regular savings accounts do not.

When your bank sends Form 1099-INT

Banks and credit unions are required to file Form 1099-INT with the IRS if you earned $10 or more in interest during the calendar year. You receive a copy by January 31 of the following year. The form shows the total interest paid to you and goes to both you and the IRS, so the IRS already knows about it.

If you earned less than $10, the bank does not send the form. This does not mean the interest is not taxable—it is. You still report it on your tax return. The $10 threshold is just the point at which the bank must file with the IRS; below that, it is your responsibility to track and report it.

If you have multiple savings accounts at different banks, each bank sends its own 1099-INT. You add all the interest together when you file your return. If one bank sends you a 1099-INT and another does not because it fell below $10, you still add both amounts to your reported interest income.

How interest income affects your tax bill

Interest is added to your other income—wages, self-employment income, investment gains—and taxed at your marginal rate. If you earn $50,000 in wages and $500 in interest, you report $50,500 in total income. The $500 is taxed at whatever bracket applies to that portion of your income.

For 2024, federal tax brackets range from 10% to 37% depending on filing status and total income. A single filer in the 22% bracket pays roughly 22 cents in federal tax for every dollar of interest earned. State income tax, where it applies, adds to this amount. Some states tax interest at the same rate as wages; others have lower rates or no income tax at all.

Interest income can also push you into a higher tax bracket. If you are close to a bracket boundary, $500 in interest might move you from the 12% bracket to the 22% bracket, meaning that $500 is taxed at 22% rather than 12%. This is why high-yield savings accounts, while they pay more interest, also create a larger tax bill.

Accounts where interest is not when ready taxable

Roth IRAs and Roth 401(k)s allow interest to grow tax-free. You pay tax on the money going in (with some limits), but the interest itself is never taxed, and you do not report it on your annual return. Withdrawals in retirement are also tax-free, provided you meet age and holding-period rules.

Traditional IRAs and Traditional 401(k)s defer the tax. Interest compounds inside the account without annual tax, but when you withdraw the money in retirement, the entire withdrawal—including all the interest—is taxed as ordinary income.

529 college savings plans work similarly to Roth accounts: interest grows tax-free, and withdrawals for may have access to education expenses are not taxed. If you withdraw for non-education purposes, the interest portion is taxed plus a 10% penalty.

Regular savings accounts, money market accounts, and certificates of deposit (CDs) in non-retirement accounts do not have this protection. All interest is taxable in the year earned.

Reporting interest on your tax return

You report interest income on Schedule B (Interest and Ordinary Dividends) if your total interest and dividend income exceeds $1,500. If it is $1,500 or less, you can report it directly on Form 1040, line 2b, without filing Schedule B.

List each account separately on Schedule B if you want to, or combine them into one line. The IRS only cares about the total. If you received a 1099-INT, the amount on that form should match what you report. If there is a discrepancy—you earned more or less than the form shows—explain it in writing or attach a statement.

If you did not receive a 1099-INT because the interest was under $10, you still report it. Write the bank name and the amount on Schedule B or directly on Form 1040. Keep your own records: bank statements, year-end summaries, or screenshots showing the interest posted to your account.

Interest from joint accounts and accounts for minors

If you own a savings account jointly with another person, the interest is split based on who owns what portion. If you each own 50%, you each report 50% of the interest. The bank may send one 1099-INT in one person's name, so you will need to contact the bank or split it yourselves and each report your share.

If you opened a savings account for a minor child, the interest is the child's income, not yours. The child must report it on their own tax return (or their parents file for them if they are a dependent). A child with interest income under a certain threshold may not have to file a return, but the rules depend on their age and whether they have other income. Check IRS Publication 929 for the current thresholds.

Custodial accounts (UTMA/UGMA) and 529 plans for minors follow similar rules: the interest belongs to the child and is reported on the child's return, though some of it may be taxed at the parents' rate under "kiddie tax" rules if the child is under 18.

Strategies to reduce interest income tax

You cannot avoid tax on interest, but you can reduce how much interest you earn and therefore how much tax you owe. Moving money from a regular savings account to a Roth IRA or 401(k) means that interest grows tax-free. The downside is that retirement accounts have contribution limits and withdrawal restrictions.

Laddering CDs—buying multiple CDs with staggered maturity dates—does not reduce tax but can help you manage when interest is earned. If you are close to a tax bracket boundary, spreading interest across two years might keep you in a lower bracket.

Tax-loss harvesting applies to investments, not savings accounts, so it does not help here. Municipal bonds pay interest that is exempt from federal tax (and sometimes state tax), but they are not savings accounts and carry different risks.

The most straightforward approach: if you have money you do not need for several years, put it in a Roth IRA or a 529 plan if you have a child. The tax-free growth compounds faster than the after-tax growth in a regular savings account. For money you need to access, accept that the interest is taxable and plan your tax bill accordingly.

Frequently Asked Questions

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

Yes. The $10 threshold only determines whether your bank files Form 1099-INT with the IRS. You still owe tax on all interest and must report it on your return. Keep your bank statements as proof of the amount.

What if the 1099-INT my bank sent me is wrong?

Contact your bank and ask them to issue a corrected form (Form 1099-INT with a "Corrected" box checked). Once you receive the corrected form, file it with your tax return. If the IRS contacts you about a discrepancy, you can show the corrected form as evidence.

Can I deduct interest I paid on a loan from the interest I earned?

No. Interest you earned is income; interest you paid on a loan is a separate deduction (if you may have access to). You report both separately. Mortgage interest and student loan interest have their own deduction rules, but they do not offset interest income.

Is interest from a CD taxed differently than interest from a savings account?

No. Both are taxed as ordinary income in the year earned. A CD that pays 5% interest is taxed the same way as a savings account that pays 5% interest. The only difference is how much interest you earn, which affects your tax bill.

What if I move money between accounts—does that create taxable interest?

No. Moving money does not create interest. Only the interest that the bank pays you is taxable. Transferring $10,000 from one account to another is not a taxable event.