Savings account interest counts as taxable income
Interest you earn from a savings account is taxable income. The IRS treats it the same way it treats wages or salary — you owe federal income tax on the full amount. Most banks and credit unions will send you a Form 1099-INT in January showing how much interest you earned during the previous year, and you report that figure on your tax return.
The tax you owe depends on your overall income and tax bracket. If you earned $500 in savings interest and you are in the 22% federal tax bracket, you would owe roughly $110 in federal tax on that interest alone (though the actual calculation is more complex because interest is added to your total income). Some states also tax interest income, so your total tax bill could be higher.
This applies to all types of savings accounts — regular savings accounts, money market accounts, and certificates of deposit (CDs). High-yield savings accounts earn more interest, which means you will owe more tax on the earnings, even though the account itself is still FDIC-insured and safe.
Key Takeaways
- The IRS requires you to report all savings account interest as income on your federal tax return, regardless of the amount.
- You will receive a Form 1099-INT from your bank in January if you earned $10 or more in interest during the year.
- The tax rate you pay on interest depends on your tax bracket, which is determined by your total income for the year.
- Some states impose additional income tax on interest earnings, so your state tax bill may be higher than your federal bill.
- Interest earned in tax-advantaged accounts like IRAs or 529 plans may not be taxable in the year earned, depending on the account type.
When you receive the Form 1099-INT
Your bank or credit union will mail or email you a Form 1099-INT by January 31 if you earned $10 or more in interest during the calendar year. This form shows the total interest paid to you and goes to the IRS at the same time it goes to you, so the IRS already knows about your interest income before you file your return.
If you earned less than $10, the bank is not required to send you a form, but you still owe tax on that interest. You will need to track it yourself — check your monthly statements or your online account history to find the total. Some banks show year-to-date interest in your account dashboard.
If you have accounts at multiple banks, you will receive a separate 1099-INT from each one. Add all the interest together when you file your return. If one bank sent you a form showing $150 and another shows $75, you report $225 total.
How interest income affects your tax bracket
Interest is added to your other income — wages, self-employment income, investment gains — to calculate your total taxable income for the year. That total determines which tax bracket you fall into and how much federal tax you owe overall.
This matters because earning interest can push you into a higher tax bracket. If you earned $45,000 in wages and $3,000 in savings interest, your taxable income is $48,000. Depending on your filing status, that extra $3,000 might move you from the 12% bracket into the 22% bracket, meaning you pay a higher rate not just on the interest but on some of your other income too.
The tax brackets change each year, so the income thresholds that trigger a higher rate are different in 2024 than they were in 2023. The IRS publishes updated brackets in the fall for the following year.
State income tax on savings interest
Most states that have an income tax also tax interest earnings. The state rate varies — some states tax interest at the same rate as wages, while others have a separate rate for investment income. A few states do not tax interest at all.
States that do not tax interest income include Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming. If you live in one of these states, you owe federal tax on your savings interest but no state income tax on it. If you live elsewhere, check your state's tax website or ask a tax preparer what rate applies to your interest income.
Some states offer small exemptions — for example, Illinois does not tax interest income at all, while Missouri allows residents to exclude a limited amount of interest from state taxation. These rules change, so verify the current rules for your state before filing.
Interest in tax-advantaged retirement and education accounts
Interest earned inside certain accounts is not taxed in the year it is earned. The most common are traditional IRAs, Roth IRAs, and 529 education savings plans. Interest compounds inside these accounts without triggering an annual tax bill.
With a traditional IRA, you do not pay tax on the interest until you withdraw the money in retirement. With a Roth IRA, you do not pay tax on the interest ever, as long as you follow the withdrawal rules. With a 529 plan, interest is tax-free if you use the money for may have access to education expenses.
Regular savings accounts held outside these structures do not get this treatment — all interest is taxable in the year earned. This is one reason people use IRAs and 529s for long-term savings: the interest compounds without being reduced by annual taxes.
Reporting interest on your tax return
You report interest income on Schedule B (Interest and Ordinary Dividends) if you have more than $1,500 in total interest and dividends for the year. If you have less than that, you can report the interest directly on Form 1040, line 1b.
List each 1099-INT you received and add up the total interest from all sources. If the total matches what the IRS received from your banks, the process is straightforward. If there is a discrepancy — for example, you earned interest the bank did not report — you will need to explain it or correct the form.
If you use tax software, it will usually walk you through entering the 1099-INT information. If you file by hand or work with a tax preparer, bring all your 1099-INT forms and any statements showing interest you earned but were not reported on a form.
Strategies to reduce tax on savings interest
You cannot avoid paying tax on savings 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 money market account or CD does not change the tax treatment — you still owe tax on the interest. But keeping less money in savings and more in tax-advantaged accounts like IRAs does reduce your taxable interest income.
Another approach is to hold savings in a Roth IRA if you are under the income limits. Interest earned in a Roth is never taxed, even when you withdraw it in retirement. A 529 plan works the same way for education savings — the interest grows tax-free as long as you use it for school.
For very large savings balances, some people use a combination of accounts: tax-advantaged accounts for long-term money and regular savings accounts for emergency funds. This is not tax evasion — it is using the accounts the tax code allows for this purpose.
Frequently Asked Questions
Do I have to report savings interest if it is less than $10?
Yes. The bank is not required to send you a 1099-INT if you earned less than $10, but you still owe tax on that interest. Track it from your statements and report it on your return. The IRS expects you to report all income, regardless of whether you received a form.
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. They will send you a corrected 1099-INT and file a corrected version with the IRS. Do not file your tax return until you have the correct form — if the amounts do not match, the IRS will send you a notice.
Can I deduct savings account fees from the interest I report?
No. You report the full interest amount on your tax return. You cannot subtract fees, even if the bank charged you a monthly maintenance fee that reduced your net earnings. Fees are not deductible on your individual return (though they may be deductible if you are self-employed and the account is for business).
Is interest from a joint savings account taxable?
Yes, and the tax treatment depends on who owns the account. If you and another person own the account jointly and both contributed to it, you each report your share of the interest. The bank will usually split the 1099-INT between you, or you may need to divide it based on your ownership percentage.
Do I owe tax on interest if I did not withdraw the money?
Yes. You owe tax on interest in the year it is earned, even if you leave it in the account and do not withdraw it. The IRS taxes interest when it is credited to your account, not when you spend or move the money.