Interest on savings accounts is taxable income in the year you earn it, regardless of whether you withdraw the money

The IRS treats interest from a savings account the same way it treats wages or salary — as ordinary income. If your savings account earned $50 in interest during the year, that $50 counts toward your total taxable income. You owe federal income tax on it at whatever your tax bracket is. Most states also tax savings interest as part of your state income tax, though a few states do not.

The bank does not automatically withhold tax from your interest. You receive the full amount in your account, but you are responsible for reporting it when you file your tax return. If you earn more than a certain threshold in interest, the bank will send you a Form 1099-INT in January, which lists exactly how much interest you earned. You use that form to report the income to the IRS.

The threshold that triggers a 1099-INT varies by bank. Most banks issue the form if you earned $10 or more in interest during the year, though some use $1 as the threshold. Even if the bank does not send you a form, you still owe tax on the interest — the form is just documentation.

Key Takeaways

  • Savings account interest is taxed as ordinary income at your federal tax rate and, in most states, at your state tax rate.
  • Banks report interest of $10 or more on a Form 1099-INT, which you receive in January and use to file your tax return.
  • You owe tax on interest in the year you earn it, even if you do not withdraw the money from the account.
  • The tax you owe depends on your total income and tax bracket, not on the interest amount alone.

How the IRS knows about your interest

When you open a savings account, you provide the bank with your Social Security number or tax ID. The bank tracks all interest paid to that account and reports it to the IRS on a Form 1099-INT. The bank sends you a copy and files another copy with the IRS, so the IRS has a record of the interest you earned.

If you have multiple savings accounts at different banks, each bank sends its own 1099-INT. You add up all the interest from all the forms and report the total on your tax return. The IRS cross-checks the 1099-INT forms it receives against the income you report, so underreporting interest is a common audit trigger.

What tax rate applies to your interest

Your interest is taxed at your marginal tax rate — the tax bracket you fall into based on your total income for the year. If you earn $50,000 in wages and $500 in interest, your total taxable income is $50,500. The $500 in interest is taxed at whatever rate applies to that portion of your income.

For 2024, federal tax brackets range from 10% to 37% depending on your filing status and total income. A person in the 22% bracket pays 22 cents in federal tax for every dollar of interest earned. A person in the 12% bracket pays 12 cents per dollar. The higher your other income, the higher the rate applied to your interest.

State income tax rates vary widely. Some states tax interest at a flat rate (Illinois taxes it at 4.95%, for example), while others use brackets like the federal system. A handful of states — including Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming — do not tax income at all, so residents of those states owe no state tax on savings interest.

When interest counts toward your income threshold

For some tax situations, the amount of interest you earn can push you over an income limit and change what you owe. If you are over 65, you get an extra standard deduction, but only if your income stays below a certain threshold. If you claim dependents, there are income limits that affect your tax credits. Interest counts toward those limits.

Similarly, if you are receiving Social Security, interest income can trigger taxation of your benefits. The IRS uses a formula called "combined income" that includes half your Social Security benefits plus all your other income, including interest. If your combined income exceeds $25,000 (single) or $32,000 (married filing jointly), some of your Social Security becomes taxable.

Interest earned but not yet paid

You owe tax on interest in the year you earn it, not the year you withdraw it. If your savings account compounds interest monthly but you do not touch the account, you still report the interest on your tax return each year. This matters most for accounts that do not pay interest out regularly — for example, some CDs or money market accounts that hold interest until maturity.

If a CD matures in January of the following year and pays out all its interest then, you report that interest on the tax return for the year it was paid, not the year you opened the CD. The bank's 1099-INT will show the correct year.

How to report interest on your tax return

When you file your federal return, you report interest income on Schedule 1 (Form 1040), which feeds into your main 1040 form. If you use tax software, it walks you through entering the information from your 1099-INT forms. If you file by hand or with a tax preparer, they use the 1099-INT to fill in the interest line.

For state taxes, most states have a similar process — you report interest on a state income tax form, usually a schedule that attaches to your main state return. The state uses the same 1099-INT information the IRS does.

If you earned interest but did not receive a 1099-INT (because it was under the bank's reporting threshold), you still report it. You write in the amount yourself. The IRS may not know about it unless the bank reported it separately, but you are legally required to report all interest income.

Interest from different account types

The tax rule is the same across all savings vehicles: interest is taxable income. A high-yield savings account, a money market account, a CD, or a regular passbook savings account all generate taxable interest. The only difference is the amount of interest each type earns — the tax treatment is identical.

Treasury bills, bonds, and notes have different rules. Interest from U.S. Treasury securities is exempt from state and local income tax but is subject to federal tax. Interest from municipal bonds is often exempt from federal tax and sometimes from state tax as well. But ordinary savings accounts have no such exemptions.

Frequently Asked Questions

Do I have to pay tax on interest if I earned less than $10?

Yes. The $10 threshold is only for when banks must send you a 1099-INT form. You owe tax on all interest you earn, even $1 or $5. You report it on your return even if you do not receive a form.

Can I deduct savings account fees from the interest I report?

No. You report the full interest amount the bank paid you. Fees you paid to the bank are not deductible against interest income. In some cases, investment-related fees may be deductible, but ordinary savings account maintenance fees are not.

What if I earned interest in one year but withdrew the money in the next year?

You report the interest in the year you earned it, not when you withdrew it. If a savings account earned $100 in interest during 2024 but you did not touch the account until 2025, you report the $100 on your 2024 tax return.

Does interest from a joint savings account get split between owners for tax purposes?

Not automatically. The bank reports all interest to the Social Security number on file. If the account is in both names, ask the bank whose number they used for the 1099-INT. You and the other owner may need to split the reported interest based on your actual ownership shares, which requires coordination when filing.

Is interest from a savings account in a child's name taxable?

Yes, and it is taxed to the child, not the parent. The bank reports it under the child's Social Security number. A child with earned income below the standard deduction may owe no tax, but the interest still has to be reported on a return — either the child's own return or as part of the parent's return under certain rules.