Savings account interest counts as income on your federal 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 also tax it, depending on where you live. This applies to all savings accounts: regular savings, money market accounts, high-yield savings accounts, and certificates of deposit (CDs).

The amount of tax you actually owe depends on how much interest you earned and your total income for the year. If you earned very little interest and your overall income is low, you might owe nothing. If you earned a lot of interest or have other income, you could owe a meaningful amount. Either way, you have to report it.

Your bank will send you a form called a 1099-INT if you earned $10 or more in interest during the year. You use this form to fill out your tax return. Even if you earned less than $10 and don't receive a 1099-INT, you still have to report the interest if you file a return.

Key Takeaways

  • Banks report interest of $10 or more to the IRS on a 1099-INT form, and you must report it on your federal tax return.
  • The tax rate on interest income depends on your total income and tax bracket — it is taxed as ordinary income, not at a special lower rate.
  • You may also owe state income tax on savings interest, depending on your state's tax laws.
  • Interest earned in a traditional IRA or 401(k) is not taxed until you withdraw the money, but interest in a regular savings account is taxed every year.

How the IRS taxes interest income

Interest is taxed as ordinary income, which means it is added to your wages, self-employment income, and any other money you earned that year. Your total income then determines which tax bracket you fall into, and that bracket determines your rate.

If you earned $50,000 in wages and $500 in savings interest, the IRS treats you as having earned $50,500. You do not pay a separate, lower tax rate on the interest — it gets taxed at whatever rate applies to your highest dollar of income. For most people, that means the interest is taxed at their marginal tax rate, which is higher than the rate on their first dollars of income.

This is different from long-term capital gains or may have access to dividends, which have their own lower tax rates. Interest does not get that treatment.

When you receive the 1099-INT form

Your bank mails or emails you a 1099-INT by January 31 of the year after you earned the interest. The form shows the total interest paid to you during the previous calendar year. If you have accounts at multiple banks, you will receive a separate 1099-INT from each one.

You need this form to fill out your tax return. If you file electronically, the tax software will ask you to enter the amount from the 1099-INT. If you file by paper, you attach a copy of the form to your return.

The IRS also receives a copy of the 1099-INT, so they know how much interest you earned. If you do not report it on your return, the IRS will notice the mismatch and may send you a notice or bill you for the unpaid tax.

Interest in retirement accounts versus regular savings

Interest earned inside a traditional IRA or 401(k) is not taxed in the year you earn it. The money grows tax-free until you withdraw it in retirement, at which point you pay income tax on the whole withdrawal (including the interest). This is one of the main reasons people use these accounts.

Interest in a Roth IRA is not taxed at all, ever — neither when you earn it nor when you withdraw it in retirement. This makes Roth accounts especially valuable if you expect to be in a higher tax bracket later.

Interest in a regular savings account, by contrast, is taxed every single year you earn it, even if you do not touch the money. This is why high-yield savings accounts are popular right now: the higher interest rate means you earn more, but you also owe more tax on it.

State income tax on savings interest

Most states tax interest income the same way the federal government does — as ordinary income added to your total. A few states do not have an income tax at all, so residents pay no state tax on interest. These include Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming.

If you live in a state with income tax, you will report the same interest amount on your state return that you reported to the IRS. Your state tax rate depends on your state's brackets and your total income, just like federal tax.

Some states offer small breaks for interest earned on certain types of savings, but these are rare and usually explore only to specific accounts or age groups. Check your state's tax department website or ask a tax preparer if you think you might may have access to.

How much tax you will actually owe

The amount of tax depends entirely on your income and tax bracket. If you earned $500 in interest and you are in the 12% federal tax bracket, you would owe roughly $60 in federal tax on that interest (before any credits or deductions). If you are in the 22% bracket, you would owe roughly $110. If you are in the 37% bracket, you would owe roughly $185.

Your state tax, if any, works the same way. A state with a 5% tax rate would add another $25 to the bill on that $500 of interest.

If your total income is very low — below the standard deduction for your filing status — you may not owe any federal tax at all, even if you earned interest. But you still have to file a return and report the interest if you earned $10 or more and meet other filing requirements.

Reporting interest on your tax return

When you file your federal return, you report interest income on Schedule B (Interest and Ordinary Dividends) if you earned more than $1,500 in interest and dividends combined. If you earned $1,500 or less, you can report it directly on Form 1040 without using Schedule B.

You enter the total interest from all your 1099-INT forms on one line. If you have multiple accounts, you add them all together and report the total. The IRS does not care which bank paid you — they only care about the total amount.

Your tax software will walk you through this step by step. If you are filing by hand or working with a tax preparer, they will know where to put the number.

Frequently Asked Questions

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

You do not receive a 1099-INT if you earned less than $10, but you still have to report the interest on your return if you file one. The $10 threshold is only for the bank's reporting requirement, not for your filing requirement. If you earned any interest at all and you are required to file a return, report it.

Can I deduct the taxes I pay on savings interest?

No. Interest income is taxed, but you cannot deduct the tax itself as a separate item. You straightforward report the interest, calculate your tax based on your total income, and pay what you owe. There is no deduction for "taxes paid on interest."

What if my bank did not send me a 1099-INT but I earned interest?

Contact the bank and ask them to issue one. If they do not, you still have to report the interest on your return. You can use your account statements to figure out how much you earned. The IRS may not have a record of it, but that does not mean you do not owe tax on it.

Is interest from a money market account taxed differently?

No. Money market accounts are treated the same as savings accounts for tax purposes. The interest is reported on a 1099-INT and taxed as ordinary income. The only difference is the account type and the interest rate your bank offers.

Does moving money between my own accounts affect the tax I owe?

No. Transferring money from one account to another is not income — it is just moving your own money around. Only the interest the bank pays you is taxable. Deposits, transfers, and withdrawals do not change your tax bill.