Savings account interest counts as income on your tax return

The interest your bank pays you on a savings account is taxable income. The IRS treats it the same way it treats wages or salary — you have to report it, and you may owe federal income tax on it. Your state may tax it too, depending on where you live.

The bank will send you a form called a 1099-INT in January if you earned $10 or more in interest during the previous year. You use that form to report the interest on your tax return. Even if the bank doesn't send you a 1099-INT because your interest was under $10, you still have to report it if you file a return.

How much tax you actually owe depends on your total income and your tax bracket. Someone in the 22% tax bracket pays more tax on the same interest than someone in the 12% bracket. The interest itself doesn't change — only the tax rate applied to it.

Key Takeaways

  • Banks report savings account interest to the IRS on a 1099-INT form if you earn $10 or more in a year.
  • You report this interest as income on your federal tax return, and it may be subject to both federal and state income tax.
  • The tax you owe depends on your total income and which tax bracket you fall into, not on the interest amount alone.
  • High-yield savings accounts earn more interest, which means more taxable income — the higher APY does not reduce your tax burden.
  • You can reduce taxable interest by holding savings in certain retirement accounts like traditional IRAs or 401(k)s, where interest grows tax-deferred.

When the bank sends you a 1099-INT form

Your bank mails or emails you a 1099-INT by January 31 each year if you earned at least $10 in interest during the previous calendar year. The form shows the total interest paid to you. You receive one copy and the bank sends another to the IRS.

If you have multiple savings accounts at different banks, you may receive multiple 1099-INT forms — one from each bank. You add all the interest together when you file your return. If you earned interest at only one bank and it was under $10, the bank won't send a form, but you still report the interest if you file a return.

Keep your 1099-INT forms with your tax records. You don't mail them to the IRS, but you need them to fill out your return accurately, and you should keep them for at least three years in case the IRS asks questions.

How interest income affects your tax bracket and what you owe

Interest is added to your other income — wages, self-employment income, investment gains — to calculate your total taxable income. That total determines which tax bracket you fall into. The higher your total income, the higher your tax rate, and the more you owe on every dollar of income, including interest.

For example, if you earn $50,000 in wages and $500 in savings interest, your taxable income is $50,500. That $500 is taxed at whatever rate applies to income in your bracket. If you're in the 22% federal bracket, you owe roughly $110 in federal tax on that interest. Someone in the 12% bracket would owe roughly $60 on the same $500.

This is why high-yield savings accounts, which pay more interest, also create a larger tax bill. The higher APY means more interest earned, which means more income to report and more tax owed — unless that interest is held in a tax-advantaged account.

Interest in retirement accounts and tax-deferred growth

Interest earned inside a traditional IRA or 401(k) is not taxed in the year it's earned. The interest compounds and grows without triggering a tax bill until you withdraw the money in retirement. This is called tax-deferred growth.

A Roth IRA works differently: interest is not taxed when you earn it, and it's not taxed when you withdraw it in retirement, as long as you follow the rules. This is called tax-free growth.

If you have money sitting in a regular savings account earning interest, moving some of it into a retirement account can reduce your taxable interest income. You're limited to how much you can contribute each year — for 2024, the limit is $7,000 for most people under 50, and $8,000 if you're 50 or older — but the tax savings can be significant if you're in a higher bracket.

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 interest and dividends combined. If you have less than that, you can report it directly on Form 1040, line 1b. Most people with a single savings account will use the simpler method.

Write the total interest from your 1099-INT form onto the appropriate line. If you have multiple 1099-INT forms, add them together and report the total. The IRS matches the amount you report against what the banks reported, so accuracy matters.

If you use tax software like TurboTax or TaxAct, you enter the interest amount and the software puts it in the right place. If you file by hand or with a tax preparer, they'll handle the placement. Either way, the interest gets added to your income and taxed at your marginal rate.

State income tax on savings interest

Most states tax interest income the same way the federal government does — as ordinary income. A few states don't tax income at all: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming have no state income tax. If you live in one of these states, you only owe federal tax on your interest.

If you live in a state with income tax, you'll report the same interest on your state return. Some states have different tax rates or brackets than the federal government, so your state tax bill may be higher or lower than your federal bill on the same amount of interest. Check your state's tax authority website to see the current rate.

Frequently Asked Questions

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

The bank won't send you a 1099-INT if you earned less than $10, but you still have to report it on your return if you file one. The $10 threshold is just when the bank is required to report it to the IRS — it doesn't mean the income is tax-free.

What if I earned interest but didn't get a 1099-INT?

Contact the bank and ask for the form. If the bank says you earned less than $10 and won't issue one, you still report the interest on your return. Keep your bank statements as proof of the amount. The IRS may have received a report from the bank even if you didn't get a copy.

Can I deduct savings account interest as a loss?

No. Interest income is income, and you can't deduct it. You report it and pay tax on it. You can't offset it with other losses unless those losses are investment losses from stocks, bonds, or mutual funds, and even then the rules are strict.

Does interest from a money market account get taxed the same way?

Yes. Money market accounts are savings accounts, and the interest is taxed as ordinary income. You'll receive a 1099-INT if you earn $10 or more, and you report it the same way you report savings account interest.

What about interest from CDs or certificates of deposit?

CD interest is also taxable and reported on a 1099-INT. You report it even if you haven't withdrawn the money yet — the tax is due in the year the interest is credited to your account, not when you cash in the CD.