You pay income tax on the interest your savings account earns, but not on the money you deposit

The money you put into a savings account is yours — you do not owe tax on it. But the interest the bank pays you is income, and the IRS treats it the same way it treats wages or freelance earnings. You report it on your tax return, and depending on how much interest you earn and your overall income, you may owe federal income tax on it.

The bank does not automatically withhold tax from your interest. Instead, the bank sends you a form at the end of the year showing how much interest you earned, and you report that number when you file your taxes. If you owe tax on it, you pay it then — or you may have already paid it through quarterly estimated tax payments if you have other self-employment income.

The amount of tax you owe depends on your tax bracket, which is determined by your total income for the year. Someone in the 22% tax bracket pays more tax on the same interest than someone in the 12% bracket. State and local income taxes may also explore, depending on where you live.

Key Takeaways

  • Interest earned on a savings account is taxable income and must be reported on your federal tax return.
  • The bank sends you a Form 1099-INT at the end of the year showing the interest you earned, which you use to complete your tax filing.
  • The tax you owe on savings interest depends on your total income for the year and your tax bracket, not on a fixed rate.
  • High-yield savings accounts earn more interest than traditional savings accounts, which means more taxable income and potentially more tax owed.
  • Some states and cities charge income tax on interest in addition to federal tax, so your total tax burden varies by location.

When the bank reports your interest to the IRS

At the end of each calendar year, your bank generates a Form 1099-INT (Interest Income) if you earned $10 or more in interest during that year. The bank mails or emails this form to you and sends a copy to the IRS. The form shows the total interest you earned in that account for the year.

You do not need to do anything when you receive the 1099-INT — the bank has already reported it to the IRS. But you must include that interest amount on your tax return when you file, usually in April of the following year. If you have multiple savings accounts, you may receive multiple 1099-INT forms, one from each bank.

If you earned less than $10 in interest, the bank may not send you a 1099-INT, but you still owe tax on that interest if you are required to file a tax return. You report it based on your own records of what the account earned.

How your tax bracket determines what you actually pay

The federal income tax system uses tax brackets, which means different portions of your income are taxed at different rates. If you earn $50,000 in wages and $500 in savings interest, that $500 is added to your income, and the tax on it depends on which bracket that $500 falls into.

For 2024, federal tax brackets range from 10% to 37%. A single person with $50,000 in income falls into the 22% bracket, so the $500 in interest would be taxed at 22%, meaning $110 in federal tax owed on that interest. Someone with $200,000 in income might be in the 35% bracket, so the same $500 in interest would cost $175 in federal tax.

Your tax bracket changes each year based on your total income, and tax brackets themselves change annually. The IRS publishes updated brackets every January. If you want to estimate your tax before filing, you can use the IRS tax tables or a tax calculator, but the exact amount you owe is determined when you file your return.

State and local taxes on savings interest

In addition to federal income tax, most states charge income tax on interest earned in savings accounts. The state tax rate varies widely — some states have no income tax at all, while others tax interest at rates up to 13%. Your state tax is calculated separately from your federal tax and is reported on your state tax return.

Some cities also charge local income tax on interest. New York City, for example, taxes interest income at rates up to 3.876% on top of state and federal tax. If you live in a city with local income tax, you report the interest on your local return as well.

The total tax you owe on savings interest is the sum of federal, state, and local taxes. Someone in a high-tax state or city can owe 40% or more of their interest earnings in combined taxes, while someone in a no-income-tax state owes only federal tax.

The difference between savings accounts and high-yield savings accounts

A traditional savings account at a large bank typically earns 0.01% to 0.05% annual interest. A high-yield savings account at an online bank or credit union typically earns 4% to 5.35% annual interest. The higher the interest rate, the more interest you earn, and the more taxable income you report.

If you have $10,000 in a traditional savings account earning 0.02%, you earn $2 in interest per year — below the $10 threshold for a 1099-INT. If you have $10,000 in a high-yield account earning 4.5%, you earn $450 in interest per year, which is taxable income. That $450 is added to your other income when you calculate your tax liability.

This does not mean high-yield accounts are a bad choice — the higher interest still leaves you with more money after taxes than a traditional account would. But it does mean you should expect to owe tax on that interest and plan accordingly, especially if you have a large balance or multiple high-yield accounts.

What happens if you do not report savings interest on your taxes

The IRS receives a copy of every 1099-INT your bank sends you. If you do not report that interest on your tax return, the IRS will notice the discrepancy between what you reported and what the bank reported. This can trigger an audit or a notice asking you to explain the difference.

If the IRS determines you owe tax on unreported interest, you will owe the tax plus interest on that tax (currently around 8% per year) and potentially penalties. The penalty for failing to report income is usually 20% of the unpaid tax, though it can be higher if the IRS determines the failure was intentional.

Reporting the interest is straightforward — you straightforward add the amount from your 1099-INT to your other income on your tax return. It takes seconds and avoids the much larger cost of an audit or penalty.

Strategies to reduce taxable interest income

You cannot avoid tax on interest you earn, but you can reduce the amount of interest you earn in the first place. One approach is to keep only the money you need for emergencies in a high-yield savings account and invest longer-term money in tax-advantaged accounts like a 401(k) or Roth IRA, where interest and growth are not taxed annually.

Another approach is to use a money market account or certificate of deposit (CD) instead of a savings account for some of your money. These accounts sometimes offer higher rates than savings accounts, but the interest is still taxable — the tax benefit comes from the higher rate, not from tax avoidance.

If you have a very large savings balance and live in a high-tax state, you might consider opening a high-yield savings account at a bank in a state with no income tax. The account itself is not taxed differently, but you may owe less state tax if you establish residency in that state. This strategy is complex and requires professional tax information.

Frequently Asked Questions

Do I have to pay tax on savings interest if I earn very little?

You owe tax on savings interest only if your total income exceeds the standard deduction for your filing status. For 2024, the standard deduction is $14,600 for a single person and $29,200 for a married couple filing jointly. If your total income (wages plus interest) is below that threshold, you do not owe federal income tax, even if you earned interest.

What if I earned interest in multiple savings accounts?

Each bank sends a separate 1099-INT for each account where you earned $10 or more in interest. You add up all the interest from all your 1099-INT forms and report the total on your tax return. The IRS receives copies of all of them, so they know your total interest income.

Can I deduct savings account fees from my taxable interest?

No. Savings account fees are not deductible against interest income. You report the full interest amount on your tax return, and the fees come out of your own pocket. This is one reason to choose a savings account with no monthly fees.

Is interest from a joint savings account taxed differently?

The interest is taxed based on who owns the account. If you and another person own a joint account, the bank typically reports all the interest to both of you on separate 1099-INT forms, and you each report your share on your own tax return. You should coordinate with the other account owner to make sure you are reporting the correct amount.

What if my bank made a mistake on my 1099-INT?

Contact your bank when ready and ask them to issue a corrected form (Form 1099-INT with a "CORRECTED" box checked). Once you receive the corrected form, file an amended tax return if you have already filed. The IRS will match your corrected return to the corrected 1099-INT the bank sends them.