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 don't pay tax on it when you deposit it or when you withdraw it. But the interest the bank pays you for keeping money there is taxable income. The bank reports this interest to the IRS, and you report it on your tax return the same way you'd report wages or other income.

How much tax you owe depends on how much interest you earned and your overall income for the year. The higher your total income, the higher your tax rate on that interest. If you earned very little interest — say, under $10 — you may still need to report it, but it might not change what you owe.

Key Takeaways

  • Banks report savings account interest to the IRS on a Form 1099-INT, which you receive by January 31 each year.
  • You must report all interest income on your tax return, even if the amount is small or the bank didn't send you a form.
  • The tax rate on interest depends on your total income for the year and your tax bracket, not on the interest amount alone.
  • High-yield savings accounts earn more interest than traditional savings accounts, which means more taxable income but also more money in your account.

How the IRS finds out about your interest

When your savings account earns interest, the bank automatically sends a report to the IRS called a Form 1099-INT. The bank also mails or emails you a copy of this form by January 31 of the following year. This form shows exactly how much interest you earned during the previous year.

You don't have to do anything to trigger this report — it happens automatically once you've earned interest. The IRS cross-checks the interest the bank reports against what you report on your tax return, so underreporting or forgetting to report interest can trigger an audit notice.

If you earned less than $10 in interest at a particular bank, that bank may not be required to send you a Form 1099-INT, but you still owe tax on that interest if you have other income. The safest approach is to add up all interest from all your accounts and report the total.

What tax rate applies to your interest

Interest income is taxed as ordinary income, meaning it's taxed at the same rate as wages or salary. Your tax rate depends on your total income for the year and which tax bracket you fall into. If you earn $30,000 in wages and $500 in interest, the IRS treats that $500 the same as if it were wages.

The federal tax brackets change each year. For 2024, a single person with income under roughly $11,600 owes no federal income tax, while someone earning $50,000 to $100,000 falls into a higher bracket. Your interest gets added to your other income, and you pay tax on the combined total.

Some states also tax interest income, while others do not. If you live in a state with income tax, check your state's rules — a few states exempt interest earned in savings accounts, but most do not.

The difference between high-yield and traditional savings accounts

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. This means you earn more money, but you also owe more tax on that interest.

If you have $10,000 in a high-yield account earning 4.5%, you'll earn about $450 in interest over a year. If that same $10,000 is in a traditional savings account earning 0.01%, you'll earn about $1 in interest. The difference in your account is $449, but the difference in taxes owed is also significant — you might owe $100 or more in federal tax on the high-yield interest, depending on your income bracket.

Despite the extra tax, high-yield accounts are usually still worth it because you're earning real money on your savings. The tax is only owed on the interest you actually earned, not on your original deposit.

Reporting interest on your tax return

When you file your taxes, you report interest income on Schedule B (if you use the long form) or directly on your 1040 form (if you use the short form). Most tax software will ask you to enter the interest amounts from your Form 1099-INT documents, and the software will automatically put the total in the right place on your return.

If you have interest from multiple banks or accounts, add them all together and report the total. You don't file separate forms for each account — one total line is all you need.

If you didn't receive a Form 1099-INT but you know you earned interest, you still report it. Write down the amount, note which bank or account it came from, and include it in your interest income total. Keeping your own records of interest earned protects you if there's ever a discrepancy with what the bank reported.

When interest income affects other tax benefits

In some cases, the amount of interest you earn can affect whether you're may have access to to other tax breaks. For example, certain education credits or retirement account deductions have income limits. If your interest income pushes you over that limit, you might lose part of a benefit you were counting on.

This is rare for people with modest savings, but it's worth knowing. If you're close to an income threshold for a tax benefit, check whether your interest income will affect it. A tax professional or tax software can flag these situations for you.

Frequently Asked Questions

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

Yes. The IRS requires you to report all interest income, even small amounts. While banks don't have to send a Form 1099-INT for interest under $10, you still owe tax on it. If you earned $5 in interest, add it to your return.

What if I have a joint savings account with someone else?

The bank reports the total interest earned on the account. You and the other account holder need to decide how to split that interest for tax purposes — usually 50/50 unless you have a different agreement. Each person reports their share on their own tax return.

Can I deduct any expenses related to my savings account?

Generally, no. Interest income is taxed, but you can't deduct fees you paid to maintain the account or costs of opening it. The interest you report is the net amount after the bank has already deducted any fees.

Does moving money between my own accounts create taxable income?

No. Transferring money from one account to another is not taxable. Only the interest the bank pays you is taxable income. Moving your own money around doesn't create income.

What happens if the bank reports the wrong amount of interest?

Contact the bank and ask them to issue a corrected Form 1099-INT. If you've already filed your return, you can file an amended return (Form 1040-X) with the correct interest amount. Keep documentation of the correction in case the IRS asks questions.