Interest from your savings account counts as income to the IRS
Yes, 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 owe federal income tax on it. Most states also tax savings interest as part of your state income tax, though a few states do not.
The amount you owe depends on how much interest you earned and what tax bracket you fall into. If you earned $10 in interest over a year, you will owe tax on that $10. If you earned $500, you will owe tax on that $500. Your bank will send you a form at the end of the year showing exactly how much interest was paid to you, and you will report that number on your tax return.
This might sound unfair when interest rates are low, but it is the rule whether you earn $5 or $5,000 in interest. The good news is that the tax you owe is usually small, because savings account interest rates are modest compared to your overall income.
Key Takeaways
- Your bank reports all savings interest to the IRS on a Form 1099-INT, and you must report this amount on your federal tax return.
- The tax you owe on interest is calculated at your ordinary income tax rate, which depends on your total income and filing status.
- If you earned less than $10 in interest during the year, your bank does not have to send you a Form 1099-INT, but you still owe tax on it if you file a return.
- Some savings vehicles like Roth IRAs and Health Savings Accounts let interest grow without creating a tax bill, though they have their own rules about when you can withdraw the money.
How the IRS finds out about your interest
Your bank automatically reports the interest it paid you to the IRS using a document called a Form 1099-INT. The bank sends you a copy and sends another copy to the IRS. This happens every January for interest earned during the previous calendar year.
You do not have to do anything to trigger this report — it happens whether you ask for it or not. The bank is required by law to send it if you earned $10 or more in interest during the year. If you earned less than $10, the bank may not send the form, but you still owe tax on whatever interest you did earn.
When you file your tax return, you report the number from your Form 1099-INT on Schedule 1 (if you file the long form) or directly on your return (if you use tax software). The IRS already has a copy of this form, so if your return does not match what the bank reported, the IRS will notice.
What tax rate applies to your interest
Savings interest is taxed as ordinary income, which means it is taxed at whatever rate applies to your regular income. If you earn $40,000 a year and fall into the 12% federal tax bracket, then your $500 in savings interest is also taxed at 12%. If you earn $100,000 and fall into the 22% bracket, your interest is taxed at 22%.
The more income you have from all sources, the higher your tax bracket, and the more you pay on your interest. This is why someone with a high salary pays more tax on the same $500 in interest than someone with a low salary.
Your state income tax works the same way. Most states tax savings interest at your state income tax rate. A few states — including Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming — do not have a state income tax at all, so residents of those states owe no state tax on interest. New Hampshire and Tennessee tax only interest and dividends, not wages.
When you might owe more tax than you expect
If you have money in multiple savings accounts at different banks, each bank sends its own Form 1099-INT. You add up all the interest from all the forms and report the total on your tax return. This can push you into a higher tax bracket if the combined interest is substantial.
If you are retired and living on savings, interest income counts toward your total income for the year. This can affect whether you have to file a return at all, and it can also affect other tax situations — for example, it might make more of your Social Security taxable, or it might disqualify you from certain tax deductions.
If you are a student claimed as a dependent on your parents' return, your interest income still counts as your income. Depending on how much you earned, it might trigger a requirement for you to file your own return even if your parents file one for the household.
Interest in tax-advantaged accounts works differently
Some savings and investment accounts are designed so that interest and growth do not create a tax bill in the year they are earned. The most common are Roth IRAs, Health Savings Accounts (HSAs), and 529 college savings plans.
In a Roth IRA, interest grows tax-free and you never pay tax on it when you withdraw it, as long as you follow the account rules (generally, you must be 59½ and have held the account for at least five years). In an HSA, interest grows tax-free and withdrawals for may have access to medical expenses are also tax-free. In a 529 plan, interest grows tax-free and withdrawals for may have access to education expenses are tax-free.
These accounts have strict rules about when you can withdraw money and what you can use it for. If you withdraw money for the wrong reason or at the wrong time, you may owe taxes and penalties. But if you follow the rules, the tax savings can be significant, especially over many years.
A regular savings account at a bank is not tax-advantaged — interest is always taxable. If you want to avoid taxes on interest, you would need to move money into one of these special accounts, though each has its own purpose and may be able to access requirements.
How to report interest on your tax return
If you use tax software like TurboTax, H&R Block, or TaxAct, the software will ask you to enter information from your Form 1099-INT. You type in the total interest amount, and the software puts it in the right place on your return automatically.
If you file by hand or work with a tax preparer, you will need to give them your Form 1099-INT or tell them the interest amount. They will enter it on Schedule 1 (for federal returns) and on your state return as well.
You do not need to do anything special or file extra forms just because you have interest income. It goes on your regular tax return like any other income. The only exception is if you have investment income from multiple sources — stocks, bonds, rental property, and so on — in which case you might need to file additional schedules, but that is a separate issue from savings interest alone.
Frequently Asked Questions
Do I have to pay taxes on interest if I earned less than $10?
Your bank does not have to send you a Form 1099-INT if you earned less than $10, but you still owe tax on whatever interest you did earn if you file a return. The threshold of $10 is just when the bank is required to report it — it does not mean the IRS does not care about smaller amounts.
What if I forgot to report interest income on my tax return?
The IRS will likely catch it because they have a copy of your Form 1099-INT from your bank. If you realize you missed it, you can file an amended return using Form 1040-X. It is better to correct it yourself than to wait for the IRS to contact you, because the IRS can add penalties and interest to what you owe.
Can I deduct the taxes I pay on interest from my interest income?
No. You report the full amount of interest as income, and then you pay tax on it at your tax rate. You cannot reduce the interest amount by the taxes you owe. However, if you paid estimated taxes or had taxes withheld from other income, those payments reduce your overall tax bill.
Does interest from a money market account get taxed the same way as a savings account?
Yes. Money market accounts, savings accounts, and certificates of deposit (CDs) all earn interest that is taxed as ordinary income. The bank reports it on a Form 1099-INT the same way, and you report it on your tax return the same way.
What if I moved money between banks during the year — do I get multiple 1099 forms?
Yes, each bank sends its own Form 1099-INT for the interest it paid you. You add up all the interest from all your banks and report the total on your tax return. This is not a problem — the IRS expects people to have accounts at multiple banks.