Yes, you owe federal income tax on savings account interest, and possibly state tax too
The interest your bank pays you on a savings account counts as taxable income. The IRS treats it the same way it treats wages or freelance earnings — you report it on your tax return and pay income tax on the full amount. Your bank will send you a form called a 1099-INT each January listing all the interest you earned the previous year, and you use that number when you file.
How much tax you actually owe depends on your total income and your tax bracket. Someone in the 22% bracket pays roughly 22 cents in federal tax for every dollar of interest earned. Someone in the 12% bracket pays roughly 12 cents. The rate is the same whether the interest came from a savings account, money market account, or certificate of deposit.
Most states also tax savings account interest as part of your state income tax, though a handful of states do not. If you live in a state with income tax, you will report the same 1099-INT amount on your state return as well.
Key Takeaways
- Your bank reports all savings account interest to the IRS on a 1099-INT form, and you must report it as income on your federal tax return.
- The tax rate on interest depends on your overall income and tax bracket, ranging from 10% to 37% at the federal level.
- Most states tax savings account interest as part of state income tax, though a few states exempt it entirely.
- You do not owe tax on the principal (the money you deposited), only on the interest the bank paid you.
- High-yield savings accounts earn more interest but are taxed the same way as traditional savings accounts.
When your bank sends you the 1099-INT form
By January 31 each year, your bank mails or emails you a 1099-INT showing all the interest credited to your account during the previous calendar year. If you earned less than $10 in interest, the bank may not be required to send the form, but you still owe tax on that interest if you have other income.
The 1099-INT shows the total interest in Box 1. That is the number you report on your federal tax return, usually on Schedule 1 (Form 1040) or directly on your return depending on your filing software. Keep a copy for your records — the IRS receives a copy too, so the numbers need to match.
If you have multiple savings accounts at different banks, you will receive a separate 1099-INT from each one. Add them all together when you report your total interest income.
How your tax bracket determines what you actually pay
The federal tax rate on interest is not a flat percentage — it depends on your total income for the year. The IRS uses tax brackets, which are income ranges with different rates. In 2024, for example, a single filer in the 22% bracket pays 22% federal tax on each additional dollar of income, including interest.
This means a person earning $50,000 in wages plus $500 in savings interest pays tax on $50,500 total. The interest pushes them slightly higher into their bracket, so roughly $110 of that $500 goes to federal tax (22% of $500). Someone earning $200,000 in wages plus the same $500 in interest would owe roughly $185 in federal tax on that interest (37% of $500), because they are in a higher bracket.
Tax brackets change each year and vary by filing status (single, married filing jointly, head of household). Your tax software or a tax professional can show you exactly what rate applies to your situation.
State income tax on savings interest
Most states that have an income tax also tax savings account interest at the same rate they tax wages. You report the same 1099-INT amount on your state return. A few states — including Pennsylvania, Illinois, and Mississippi — exempt interest and dividend income from state tax, so residents of those states owe federal tax but not state tax on savings interest.
If you live in a state with no income tax (like Florida, Texas, or Wyoming), you owe no state tax on savings interest, only federal. Check your state's tax authority website or ask a tax preparer if you are unsure whether your state taxes interest income.
The difference between interest earned and principal
You do not owe tax on the money you deposited into the account — only on the interest the bank paid you. If you put $10,000 into a savings account and earned $200 in interest over the year, you owe tax only on the $200. The $10,000 is your own money that you already paid tax on (or will pay tax on when you earned it), so the IRS does not tax it again.
This matters when you withdraw money. If you take out $5,000 from an account that holds $10,200 (your $10,000 plus $200 in interest), you are withdrawing your own principal, not the interest. You do not owe additional tax on that withdrawal — you already owed tax on the interest when it was credited to the account.
High-yield savings accounts and money market accounts
High-yield savings accounts and money market accounts earn more interest than traditional savings accounts, but the tax treatment is identical. You receive a 1099-INT from the bank, report the interest as income, and pay tax at your regular rate. The higher interest rate does not change how the IRS taxes it — it just means you owe tax on a larger amount.
A high-yield account earning 4.5% annual interest on $10,000 generates $450 in taxable income. A traditional savings account earning 0.01% on the same $10,000 generates $1 in taxable income. Both are reported on a 1099-INT and both are taxed the same way; the difference is only in the dollar amount.
Certificates of deposit and other savings products
CDs, money market accounts, and savings bonds all generate interest that is taxed as ordinary income. You will receive a 1099-INT (or 1099-OID for certain bonds) and report it the same way you report savings account interest. The only exception is Series I Bonds and Series EE Bonds, where you can choose to defer reporting interest until you cash the bond or it matures, but you will still owe tax eventually.
If you cash a CD before its maturity date, you may owe an early withdrawal penalty, but that penalty is separate from the income tax on interest. The penalty reduces the amount you receive, but you still owe income tax on all the interest earned, even if you paid a penalty.
Frequently Asked Questions
Do I owe tax on interest if I earned less than $10?
The bank is not required to send a 1099-INT if you earned less than $10, but you still owe federal income tax on that interest if you have other income. Report it on your tax return even if you do not receive a form. If you have no other income, you may not owe tax due to the standard deduction, but it is safer to report it.
What if I did not receive a 1099-INT from my bank?
Contact the bank and ask them to send it or provide the interest amount. If the bank cannot locate it, you can request a transcript from the IRS showing what they received. Do not skip reporting the interest just because you did not get the form — the IRS has a copy and will notice if your return does not match.
Can I deduct savings account interest as a loss?
No. Interest income cannot be deducted or offset against other income. You report it in full and pay tax on it. The only way to reduce the tax is to earn less interest (by keeping less money in savings) or to be in a lower tax bracket (by having lower overall income).
Is interest from a joint savings account split between owners for tax purposes?
Not automatically. The bank reports the full interest amount on a 1099-INT to whoever the account is registered under. If the account is truly joint and both owners contributed equally, you may need to split the reported interest on your tax returns, but you will need to file an amended return or coordinate with the other owner. Ask your bank how they handle this.
Do I owe tax on interest if I am a minor?
Yes. Minors owe income tax on savings account interest just like adults do. A minor with only savings interest income may not owe tax if the interest is below the standard deduction (roughly $1,300 in 2024), but the interest must still be reported if it exceeds that threshold. Parents cannot claim the interest as their own income.