Yes, the IRS taxes savings account interest as ordinary income

Interest earned in 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 full amount. Your bank will report this interest to the IRS on a Form 1099-INT if you earn $10 or more in a calendar year, and you must report it on your tax return.

The tax rate depends on your overall income and tax bracket, not on the interest amount itself. A person 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.

This applies to all savings accounts held in your own name at banks, credit unions, and online banks. The interest rate does not matter—whether your account earns 0.01% or 5%, the interest is taxable.

Key Takeaways

  • Banks report savings interest to the IRS on Form 1099-INT when you earn $10 or more in a year, and you must include it on your tax return.
  • The tax you owe on interest depends on your tax bracket, not the interest rate—the same $100 in interest costs different people different amounts in tax.
  • Interest is taxed as ordinary income at federal, state, and sometimes local levels, so the total tax burden varies by location.
  • You can reduce taxable interest by holding money in tax-advantaged accounts like IRAs or 529 plans, though these have contribution limits and withdrawal rules.
  • If you earn less than the standard deduction for your filing status, you may owe no federal income tax even if you have taxable interest.

When you receive the Form 1099-INT from your bank

Your bank sends Form 1099-INT to you and the IRS by January 31 of the year following the one in which you earned the interest. The form shows the total interest paid into your account during the calendar year. You receive one form per account if interest was earned, though some banks combine multiple accounts on a single form.

You are responsible for reporting this interest even if you do not receive the form—for example, if the bank made an error or if you moved and the form went to an old address. The IRS has a copy, so unreported interest will eventually be flagged. If you do not receive a 1099-INT by early February, contact your bank and ask for a copy or a corrected one.

Keep the form with your tax records. When you file your return, you report the interest on Schedule 1 (Form 1040) under "Interest" and add it to your total income. If you have interest from multiple accounts or institutions, you add all of it together on that line.

How your tax bracket determines what you actually owe

The amount of tax you pay on interest depends on your tax bracket, which is determined by your total income for the year. If you earn $50,000 in wages and $500 in interest, your interest is taxed at whatever rate applies to that portion of your income—not at a flat rate.

For 2024, federal tax brackets range from 10% to 37%. A single person with $50,000 in total income falls into the 22% bracket, meaning the last dollars of income (including interest) are taxed at 22%. A single person with $200,000 in total income falls into the 35% bracket. The same $500 in interest costs $110 in the first case and $175 in the second.

State and local income taxes add on top of federal tax. New York, California, and several other states tax interest at rates between 5% and 13%, depending on your income. Some states, including Florida, Texas, and Wyoming, do not tax income at all. If you live in a state with income tax, your total tax on interest is federal plus state.

Interest in tax-advantaged accounts does not count as taxable income

Money held in a traditional IRA or Roth IRA earns interest that is not taxed each year. The interest compounds inside the account without triggering a tax bill until you withdraw the money (or never, in the case of a Roth). This is one of the main reasons people use IRAs—the tax deferral allows money to grow faster.

A 529 college savings plan works the same way: interest and investment gains are not taxed as long as the money stays in the account and is used for may have access to education expenses. If you withdraw for non-education purposes, you owe tax on the earnings portion plus a 10% penalty.

A Health Savings Account (HSA) also grows tax-free if the money is used for may have access to medical expenses. These accounts have annual contribution limits (for 2024, $4,150 for individual coverage and $8,300 for family coverage), but the tax savings can be substantial if you have high medical costs.

The trade-off is that these accounts have rules: IRAs have contribution limits and withdrawal penalties before age 59½; 529 plans are tied to education; HSAs require a high-deductible health plan. For most people, these restrictions are worth the tax savings, but they are not the right choice for money you need to access soon.

What happens if your interest income is very small

If your total income (wages, interest, and other sources combined) is below the standard deduction for your filing status, you owe no federal income tax even if you have interest income. For 2024, the standard deduction is $14,600 for a single person and $29,200 for a married couple filing jointly.

This means a single person with $500 in wages and $200 in interest ($700 total) owes no federal tax because $700 is well below $14,600. However, you may still need to file a return to claim refundable tax credits like the Earned Income Tax Credit (EITC), even if you owe no tax.

State income tax rules vary. Some states have a standard deduction similar to the federal one; others tax all income above zero. Check your state's tax authority website to see whether you owe state tax on small interest amounts.

Interest from bonds, CDs, and money market accounts follows the same rules

Certificates of Deposit (CDs), money market accounts, and Treasury bonds all generate interest that is taxable in the same way as savings account interest. The bank or issuer reports it on a 1099-INT, and you report it on your tax return. The interest rate does not change the tax treatment—a 5% CD is taxed the same way as a 0.5% savings account.

Treasury bonds are slightly different in one respect: the interest is exempt from state and local income tax but still subject to federal tax. If you live in a high-tax state, this can make Treasury bonds more attractive than savings accounts for the same interest rate, because you avoid the state portion of the tax.

I Bonds (Series I Savings Bonds) have a special rule: you can defer reporting the interest until you cash the bond or it matures, which can be 30 years. This makes them useful for long-term savings, though the interest rate is lower than other options.

Frequently Asked Questions

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

Your bank does not send a 1099-INT if interest is under $10, but you still owe tax on it if your total income exceeds the standard deduction. The IRS does not know about it unless you report it, but failing to report it is underreporting income. Report all interest, regardless of amount.

Can I deduct savings account fees from the interest I report?

No. You report the full interest amount on your tax return. Fees paid to the bank are not deductible on your personal return (they would be deductible only if you were self-employed and the account was for business). The net interest you receive is what matters for your finances, but the gross interest is what you report to the IRS.

What if I moved during the year and did not get my 1099-INT?

Contact your bank and request a copy. The IRS has already received one, so if you do not report the interest, the IRS will eventually notice the discrepancy and send you a notice. It is easier to get the form from the bank and file an amended return than to deal with the IRS later.

Does interest in a joint savings account get split between both owners for tax purposes?

The bank reports all interest to the IRS under the Social Security number of the account owner listed first on the account. If both owners are listed, you and the other owner need to decide how to split the interest for tax purposes—usually 50/50, but it depends on how much each person contributed. Report your share on your tax return and keep documentation of the split in case the IRS asks.

Is interest taxable in the year I earn it or the year I withdraw it?

Interest is taxable in the year you earn it, even if you do not withdraw the money. If interest is credited to your account on December 31, you owe tax on it in that year, even if you do not touch the account until the following year. This is why the 1099-INT is based on the calendar year, not on when you access the money.