The IRS taxes all interest your bank pays you, with rare exceptions
Every dollar of interest your savings account earns is taxable income to the IRS. There is no threshold—not $1, not $100. If your bank paid you interest, you owe tax on it, even if the amount seems small. The only exceptions are interest from certain municipal bonds and U.S. savings bonds used for education, which are uncommon for regular savings accounts.
Your bank will send you a Form 1099-INT each January if you earned $10 or more in interest during the previous year. This form lists the total interest paid to you. You report this amount on your tax return, and the IRS receives a copy of the form too. If you earned less than $10, your bank may not send a form, but you still owe tax on whatever interest you made.
The tax rate you pay depends on your overall income and tax bracket. Interest is taxed as ordinary income, meaning it is added to your wages, self-employment income, and other earnings. A person in the 22% tax bracket pays roughly 22 cents in federal tax for every dollar of interest earned. State and local taxes may explore on top of that, depending on where you live.
Key Takeaways
- The IRS taxes all savings account interest with no minimum threshold, even amounts under $10.
- Your bank sends Form 1099-INT when interest reaches $10 or more, and the IRS gets a copy of this form.
- Interest is taxed as ordinary income at your marginal tax rate, which varies based on your total earnings for the year.
- You must report interest income even if your bank does not send a Form 1099-INT.
- High-yield savings accounts pay more interest, which means higher taxable income and a larger tax bill.
When your bank sends Form 1099-INT and what it means
Banks and credit unions are required to issue Form 1099-INT to any account holder who earned $10 or more in interest during the calendar year. The form arrives by January 31 of the following year. It shows the account holder's name, Social Security number, the financial institution's name, and the total interest paid. A copy goes to you, and a copy goes to the IRS.
If you earned less than $10, your bank is not required to send the form, but that does not mean you are off the hook. You still report the interest on your tax return. Many people miss this because they assume no form means no reporting requirement. The IRS cross-checks what banks report against what people claim on their returns, so underreporting interest—even small amounts—can trigger a notice.
If you have multiple savings accounts at different banks, you will receive a separate 1099-INT from each one. You add all the interest amounts together when you file your return. Some people consolidate their accounts to simplify tax time, though that is a personal choice and not required by law.
How your tax bracket determines what you actually owe
Interest income is stacked on top of your other income for the year. If you earn $50,000 in wages and $500 in interest, the IRS treats you as having $50,500 in taxable income. Your tax bracket is determined by your total income, not by the interest alone.
For 2024, federal tax brackets for single filers range from 10% on the first portion of income to 37% on income above $191,950. A person earning $30,000 in wages and $1,000 in interest might be in the 12% bracket, meaning roughly $120 of that interest goes to federal tax. Someone earning $150,000 in wages plus $1,000 in interest sits in the 24% bracket, so that same $1,000 in interest costs about $240 in federal tax.
State and local income taxes add another layer. New York, California, and several other states tax interest at rates ranging from 5% to 13%. Some states have no income tax at all. Your total tax bill on interest depends on your federal bracket plus your state's rate.
Why high-yield savings accounts create a bigger tax bill
High-yield savings accounts currently pay 4% to 5% annual interest, compared to 0.01% at many traditional banks. This means more interest income and a larger tax bill. A person with $50,000 in a high-yield account earning 4.5% makes $2,250 in interest per year. At a 24% federal tax rate plus a 6% state rate, that person owes roughly $750 in taxes on that interest.
The math works differently depending on your situation. If you are retired and living on savings, the extra interest income might push you into a higher tax bracket or reduce tax credits you would otherwise receive. If you are working and have substantial other income, the interest straightforward adds to your tax bill at your marginal rate. Either way, the higher the interest rate, the more you owe in taxes.
Some people move money to high-yield accounts without considering the tax impact. The interest is still worth it for many—earning $2,250 and paying $750 in tax leaves you $1,500 ahead of a traditional account paying almost nothing. But it is worth doing the math before moving large sums, especially if you are near a tax bracket boundary or rely on income-based credits.
Reporting interest on your tax return
Interest income goes on Schedule B (Interest and Ordinary Dividends) if you are filing Form 1040. You list each Form 1099-INT you received, or you can combine them into a single line if you received multiple forms. The total interest amount transfers to your main tax return, where it becomes part of your taxable income.
If you use tax software, the process is usually straightforward: you enter the amounts from your 1099-INT forms, and the software calculates your tax liability. If you file by hand or work with a tax preparer, bring all your 1099-INT forms and any statements showing interest earned.
If you earned interest but did not receive a 1099-INT (because it was under $10), you still report it. Write the amount on Schedule B or on the appropriate line of your return. Keeping your own records—bank statements, year-end summaries from your financial institution—protects you if the IRS ever questions your return.
What happens if you do not report interest income
The IRS receives a copy of every Form 1099-INT your bank sends. Their computers match what banks report against what taxpayers claim on their returns. If you report $500 in interest but your bank reported $1,000, the IRS will notice. You will receive a notice asking you to explain the difference or pay the additional tax owed.
Penalties for underreporting interest vary. If the underpayment is unintentional and you correct it promptly, you may owe only the back tax plus interest on that amount. If the IRS determines it was intentional, penalties can reach 75% of the underpaid tax. Interest on unpaid taxes compounds daily, so the longer you wait to correct the error, the more you owe.
The safest approach is to report all interest, even small amounts. The effort to hide $50 in interest is not worth the risk of an audit or penalty notice.
Frequently Asked Questions
Do I have to report interest if I earned less than $10?
Yes. The $10 threshold only determines whether your bank must send you a Form 1099-INT. You are required to report all interest income on your tax return, regardless of the amount. The IRS expects you to track and report interest even when no form is issued.
Can I deduct interest expenses to offset my interest income?
Not usually. Interest you earn is taxable income. Interest you pay on personal loans, credit cards, or car loans is generally not deductible for most taxpayers. The only common deduction is mortgage interest on a primary or secondary home, and that has limits. Consult a tax professional about your specific situation.
What if I moved money between accounts during the year—do I get taxed twice?
No. You are taxed on the interest earned, not on the money itself. If you moved $10,000 from one savings account to another, that transfer is not taxable. You report only the interest that account earned during the time your money was in it. Each bank reports the interest it paid you on its own 1099-INT.
Does interest from a money market account get taxed the same way?
Yes. Money market accounts, savings accounts, and certificates of deposit (CDs) all generate interest that is taxed as ordinary income. The rate may be higher, but the tax treatment is identical. You receive a 1099-INT for each account and report the total interest on your return.
What if I earned interest in a joint account—who pays the tax?
The bank reports the interest to both account holders. You and the other owner must decide how to split the interest for tax purposes, usually based on each person's ownership stake. If you each own 50%, you each report 50% of the interest. Coordinate with the other owner to avoid both reporting the full amount, which would trigger an IRS notice.