Yes, the interest your savings account earns is taxable income
The money you deposit into a savings account is not taxed — that is your own money. But the interest the bank pays you on that balance is taxable income to the IRS and to your state, if your state has an income tax. You owe tax on that interest in the year you earn it, whether or not you withdraw the money.
How much tax you pay depends on your total income for the year and your tax bracket. A person in the 22% federal tax bracket who earns $500 in savings interest will owe roughly $110 in federal tax on that interest alone. The exact amount varies based on your filing status, other income, and deductions.
Banks report the interest you earn on a form called a 1099-INT, which they send to you and to the IRS by January 31 each year. If you earn $10 or more in interest from a single bank, you will receive this form. You then report that interest on your tax return.
Key Takeaways
- Interest earned on savings accounts is taxable income in the year you earn it, even if you do not withdraw the money.
- Banks send you a 1099-INT form by January 31 if you earned $10 or more in interest during the year.
- The tax rate on your interest depends on your overall income and tax bracket, not on the interest amount alone.
- High-yield savings accounts earn more interest, which means you owe more tax, but the after-tax return is usually still higher than traditional savings accounts.
- You can reduce taxable interest by holding money in tax-advantaged accounts like IRAs or 401(k)s instead of regular savings accounts.
When you receive the 1099-INT form and what to do with it
Your bank will mail or email you a 1099-INT by January 31 if you earned $10 or more in interest during the previous calendar year. This form shows the total interest paid to you. You will receive one form per bank, so if you have savings accounts at three different banks, you will get three forms.
When you file your tax return, you report the interest shown on the 1099-INT on Schedule 1 (Form 1040), which feeds into your total income. The IRS receives a copy of the form directly from your bank, so they already know about the interest. Reporting it yourself is how you stay in sync with what the IRS expects to see.
If you earned less than $10 in interest at a bank, you may not receive a 1099-INT from that bank, but you still owe tax on that interest. You report it on your return even without the form.
How interest rates affect your tax bill
Higher interest rates mean more interest earned, which means a larger tax bill. A high-yield savings account paying 4.5% annual interest will generate roughly nine times more interest than a traditional savings account paying 0.5%, so your tax liability will be nine times higher too.
This does not mean high-yield accounts are a bad choice. Even after paying tax on the higher interest, you will usually have more money in your account than you would with a low-rate account. A person in the 24% tax bracket earning $450 in interest from a high-yield account will owe $108 in tax, leaving $342 after tax — still far more than the $45 in interest (and $11 in tax) from a traditional account.
The trade-off is real, though. If you are in a high tax bracket — 32% or above — the after-tax return on savings interest shrinks noticeably. In those cases, keeping large sums in a regular savings account may not be the best use of your money, but that is a question for a tax professional or financial planner, not a savings account decision alone.
Tax-advantaged accounts that shield savings from tax
If you want to save money without paying tax on the interest each year, you can use a traditional IRA or 401(k). Interest earned inside these accounts is not taxed until you withdraw the money in retirement. A Roth IRA or Roth 401(k) goes further: interest earned inside these accounts is never taxed, even in retirement, as long as you follow the withdrawal rules.
These accounts have contribution limits — for 2024, you can put up to $7,000 per year into an IRA (or $8,000 if you are 50 or older), and 401(k) limits are higher. You also cannot withdraw the money before age 59½ without penalties in most cases. But if you are saving for retirement and have room in these accounts, they are far more tax-efficient than a regular savings account.
A 529 college savings plan works similarly: interest earned inside the account is not taxed as long as you use the money for education expenses. If you withdraw for non-education purposes, you pay tax on the earnings plus a 10% penalty.
State income tax on savings interest
Most states with an income tax also tax savings interest at your state rate. If you live in a state with a 5% income tax and earn $500 in savings interest, you will owe roughly $25 in state tax on top of your federal tax.
A few states do not tax interest income at all. These include Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming. If you live in one of these states, you owe federal tax on savings interest but no state tax. Some states tax interest but exempt it for people over a certain age, usually 65 or 62 — check your state's tax authority website for the current rules.
Reporting interest from multiple banks and accounts
If you have savings accounts at five different banks, you will receive five separate 1099-INT forms. You add up all the interest from all the forms and report the total on your tax return. The IRS matches this total against the copies they receive from each bank, so the numbers must match.
If one bank fails to send you a 1099-INT but you know you earned interest there, contact the bank and ask for the form. If they do not send it, you still report the interest on your return based on your own records — your bank statements show exactly how much interest was credited each month.
Some people use savings accounts at online banks, credit unions, and traditional banks all at once. Each one reports separately. Keep your 1099-INT forms organized in one place so you do not miss any when you file.
What happens if you do not report savings interest
The IRS receives a copy of every 1099-INT your bank sends you. If you do not report the interest on your tax return, the IRS will notice the discrepancy. They may send you a notice asking you to pay the tax owed plus interest on the unpaid amount.
If the interest is small — under $100 — the IRS often does not pursue it aggressively. But if you have multiple accounts or a high-yield account, the interest can add up quickly. It is far simpler to report it on your return than to deal with a notice later.
Frequently Asked Questions
Do I have to report savings interest if I earned less than $10?
You will not receive a 1099-INT from the bank if you earned less than $10, but you still owe tax on that interest. Report it on your return based on your bank statements. The IRS expects to see all interest income, regardless of amount.
Can I deduct savings account fees from the interest I report?
No. You report the gross interest the bank paid you, not the interest minus fees. Savings account fees are not deductible on your personal tax return. You pay tax on the full interest amount.
What if my savings account is in my child's name?
The interest is taxable income to your child. If your child earned more than a certain amount in unearned income (interest, dividends, capital gains), they may need to file their own tax return. The threshold changes yearly — check the IRS website for the current limit. Your child's interest may also be taxable to you under "kiddie tax" rules if they are under 24 and a full-time student.
Does a money market account get taxed the same way as a savings account?
Yes. Money market accounts earn interest, and that interest is taxable income reported on a 1099-INT, just like savings account interest. The tax treatment is identical.
If I move money between my own savings accounts, do I owe tax on that?
No. Moving your own money from one account to another is not a taxable event. You only owe tax on the interest the bank pays you, not on transfers of your principal.