Interest on 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 the money. Most banks will send you a form called a 1099-INT at the end of the year listing all the interest you earned, and you report that amount on your tax return.
The amount of tax you actually owe depends on your total income for the year and which tax bracket you fall into. If you earned $50 in interest and your tax bracket is 22%, you would owe roughly $11 in federal tax on that interest. Some states also tax interest income, though a few do not.
This applies whether you have $100 in savings or $100,000. Any interest paid to you is taxable. The only exception is interest earned in certain retirement accounts like a traditional IRA or 401(k), where the tax is delayed until you withdraw the money.
Key Takeaways
- Banks report interest income to the IRS on a 1099-INT form, and you must report it on your federal tax return.
- The tax you owe on interest depends on your total income and tax bracket, not on the size of your savings account.
- Most states tax interest income, but a handful do not — check your state's rules if you live in one of those states.
- Interest earned in retirement accounts like IRAs and 401(k)s is not taxed until you withdraw the money.
- You may owe estimated quarterly taxes if your interest income is large enough, though most people with savings accounts do not.
When the bank sends you a 1099-INT form
Your bank will mail or email you a 1099-INT form by January 31 of the year after you earned the interest. This form shows how much interest you made during the previous calendar year. If you have accounts at multiple banks, you will receive a separate 1099-INT from each one.
You do not have to do anything with the form except keep it for your records and report the amount on your tax return. The bank also sends a copy to the IRS, so the IRS already knows about your interest income. If you do not report it, the IRS will notice the mismatch.
If you earned less than $10 in interest during the year, some banks may not send you a 1099-INT, but you still owe tax on that interest if your total income requires you to file a return.
How much tax you owe on interest income
The tax on interest is not a flat percentage. Instead, it depends on your tax bracket — the range of income that determines your tax rate. If you earned $40,000 in wages and $500 in interest, that $500 is taxed at the same rate as your highest wages, not at a special interest rate.
For example, if you are single and your total income (wages plus interest) falls between $11,000 and $44,725 in 2024, your tax bracket is 12%. That means the interest is taxed at 12%. If your total income is higher, your bracket is higher, and so is the tax rate on your interest.
The IRS publishes new tax brackets each year, and they change based on inflation. Your actual tax bill also depends on deductions and credits you may be may have access to to. If you are unsure whether you owe tax or how much, a tax preparer or the IRS website can help you figure it out.
State income tax on interest
Most states tax interest income the same way the federal government does — as ordinary income at your state tax rate. A few states do not tax interest at all. These include Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming.
If you live in one of these states, you do not owe state tax on your interest, though you still owe federal tax. If you live elsewhere, check your state's tax website or ask a tax preparer what rate applies to you. Some states have lower tax rates than others, which can make a real difference if you have a large savings account earning significant interest.
Interest in retirement accounts does not trigger when ready tax
Money in a traditional IRA or 401(k) can earn interest without you owing tax on it each year. The tax is postponed until you withdraw the money in retirement. This is one reason these accounts are useful for saving — your money can grow without being eaten away by annual taxes.
A Roth IRA works differently: you do not owe tax on the interest even when you withdraw it, as long as you follow the withdrawal rules. This makes Roth accounts especially valuable if you expect to be in a higher tax bracket later.
Interest earned in a regular savings account does not get this treatment. You owe tax on it every year, regardless of whether you withdraw it or leave it in the account.
When you might owe quarterly estimated taxes
Most people with savings accounts earn small amounts of interest and do not need to worry about this. But if you have a large savings account, a high-yield savings account, or multiple accounts earning significant interest, you might owe estimated quarterly taxes.
Estimated taxes are payments you make to the IRS four times a year instead of waiting until April. You only need to do this if you expect to owe at least $1,000 in federal tax for the year and your employer is not withholding enough tax from your paychecks to cover it. If you are retired or self-employed and earning interest as your main income, you may need to pay quarterly.
The IRS provides a worksheet to calculate whether you need to pay quarterly taxes. If you are unsure, a tax preparer can tell you whether your situation requires it.
How to report interest on your tax return
When you file your tax return, you report your interest income on Schedule B (if you use the long form) or directly on your 1040 form (if you use the short form). You list each bank and the amount of interest from the 1099-INT they sent you.
If you use tax software like TurboTax or TaxAct, you enter the information from your 1099-INT forms, and the software automatically puts it in the right place. If you use a tax preparer, bring your 1099-INT forms with you.
The key is to report the exact amount shown on your 1099-INT. The IRS has a copy, so mismatches trigger notices.
Frequently Asked Questions
Do I owe tax on interest if I earned less than $100?
Yes. There is no minimum amount of interest that is tax-free. Even $5 in interest is taxable income. However, if your total income is low enough that you do not have to file a tax return, you would not report it. The IRS website has a tool to determine whether you must file.
What if I move money between my own savings accounts — is that taxable?
No. Moving money from one account to another is not income. Only the interest the bank pays you is taxable. Transfers between your own accounts do not count.
Can I deduct losses from a savings account against interest income?
No. A savings account does not produce losses — it either earns interest or it does not. You cannot deduct anything related to a savings account from your taxes.
If I close my savings account mid-year, do I still owe tax on the interest earned?
Yes. You owe tax on all interest earned during the year, whether the account is open at the end of the year or not. The bank will still send you a 1099-INT showing the interest you earned before you closed it.
Is interest from a money market account or CD also taxable?
Yes. Interest from any savings product — money market accounts, certificates of deposit (CDs), high-yield savings accounts — is taxable income. The bank will send you a 1099-INT for each product that earned interest.