The short answer: yes, but only on the interest you earn

The money you deposit into a savings account is never taxed. The interest your bank pays you on that money is taxed as income by the federal government, and possibly by your state. The tax rate depends on your overall income and tax bracket, not on the size of your savings account.

You do not pay tax on the principal—the original money you put in. You pay tax only on the earnings. If you deposit $5,000 and earn $50 in interest over a year, you owe tax on the $50, not the $5,000.

Key Takeaways

  • Interest earned in a savings account is taxed as ordinary income at your federal tax rate, which ranges from 10% to 37% depending on your income level.
  • Your bank will send you a Form 1099-INT if you earn $10 or more in interest during the tax year, and you must report this on your federal tax return.
  • Some states tax savings account interest as part of state income tax, while others do not; check your state's rules.
  • High-yield savings accounts earn more interest than traditional savings accounts, which means you will owe more tax on the earnings, but the interest is still taxed the same way.

How the IRS taxes savings account interest

The Internal Revenue Service treats savings account interest as ordinary income. This means it is added to your wages, self-employment income, and any other money you earned that year, and then taxed at your marginal tax rate—the rate that applies to your highest bracket of income.

If you earned $50,000 in wages and $200 in savings account interest, the IRS sees $50,200 in total income. That extra $200 is taxed at whatever rate applies to income in your bracket. For 2024, if you are single and your income falls between $47,150 and $100,525, your marginal rate is 22%. So you would owe roughly $44 in federal tax on that $200 in interest.

This is different from how capital gains are taxed. If you sell stocks or investment property, you may pay a lower rate. Savings account interest does not get that treatment—it is taxed as regular income, the same as a paycheck.

When your bank reports interest to the IRS

Your bank tracks the interest you earn and reports it to both you and the IRS using a Form 1099-INT. You will receive this form 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.

Banks are required to send a 1099-INT if you earned $10 or more in interest during the tax year. If you earned less than $10, your bank may not send the form, but you still owe tax on whatever interest you earned—you just have to report it yourself.

You must include the amount from your 1099-INT on your federal tax return. If you do not report it and the IRS cross-checks your bank records, you can face penalties and interest on the unpaid tax.

State income tax on savings account interest

Most states that have an income tax also tax savings account interest. The state tax rate varies widely. Some states tax it at a flat rate; others use a progressive system like the federal government does. 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 pay no state tax on savings interest.

If you live in a state with income tax, check your state's tax authority website or your state tax return instructions to see how to report savings account interest. Some states use the same 1099-INT your bank sends to the IRS; others require you to report it separately.

High-yield savings accounts and tax

A high-yield savings account earns significantly more interest than a traditional savings account—sometimes 4% to 5% annually, compared to 0.01% or less at many large banks. The higher interest means you will owe more tax, but the tax treatment is identical. Interest from a high-yield account is still ordinary income, reported on a 1099-INT, and taxed at your marginal rate.

If you earn $1,000 in interest from a high-yield account instead of $50 from a traditional account, you owe tax on the full $1,000. At a 22% federal rate, that is $220 in federal tax instead of $11. This is why some people move money to high-yield accounts despite the tax hit—the after-tax earnings are still higher than what a traditional account would pay.

Tax-advantaged alternatives to regular savings accounts

If you want to save money and minimize taxes, a few account types offer tax advantages that regular savings accounts do not. A Roth IRA lets you earn interest and investment gains tax-free, as long as you follow the withdrawal rules. A Health Savings Account (HSA) offers tax-free growth if the money is used for medical expenses. A 529 college savings plan grows tax-free when used for education costs.

These accounts have contribution limits and rules about when you can withdraw money without penalty. They are not replacements for an emergency savings account, but they can be useful if you have money you plan to save for a specific goal over several years.

What to do if you owe tax on savings interest

When you file your federal tax return, you will report the interest from your 1099-INT on Schedule 1, line 8a (or the equivalent line for your tax year). If you use tax software, it will usually walk you through entering this information. If you file by hand, follow the instructions that come with your tax form.

The tax on savings interest is usually small—most people with regular savings accounts earn so little interest that the tax is under $100 per year. But if you have a large balance in a high-yield account, or multiple savings accounts, the interest can add up. Keep your 1099-INT forms and any statements showing interest earned, in case the IRS asks questions later.

Frequently Asked Questions

Do I have to pay tax on savings account interest if I do not receive a 1099-INT?

Yes. Banks only send a 1099-INT if you earned $10 or more in interest. If you earned less than $10, you still owe tax on it, but you have to report it yourself on your tax return. The IRS can see your interest earnings through other records, so not reporting it can result in penalties.

Can I deduct savings account interest as a loss on my taxes?

No. Interest income cannot be deducted. You can only deduct certain types of expenses and losses, and savings account interest is not one of them. You report the interest as income and pay tax on it.

What if I move money between savings accounts—do I get taxed twice?

No. Moving money from one account to another is not a taxable event. You only pay tax on the interest the money earns, not on transfers between your own accounts. The 1099-INT will show the total interest from each account separately.

Does a joint savings account change how the interest is taxed?

The interest is still taxed as ordinary income, but how it is reported depends on who owns the account. If both account holders contributed equally and own it equally, you may split the interest reporting. Consult a tax professional or your bank about the specific rules for your situation.

Is there a way to avoid paying tax on savings account interest?

Not on a regular savings account. You can reduce the amount of interest you earn by keeping less money in the account, but that defeats the purpose of saving. Tax-advantaged accounts like Roth IRAs and 529 plans offer tax-free growth, but they have rules and limits. For most people, paying tax on small amounts of savings interest is straightforward part of the process.