Banks don't tax your savings, but they report the interest you earn to the IRS
Your bank does not take a tax payment from your savings account. What happens instead is this: when you earn interest on your savings, the bank sends a record of that interest to the IRS on a form called a 1099-INT. You then owe federal income tax on that interest as part of your regular tax return. The amount you owe depends on your total income and your tax bracket, not on anything the bank does.
The confusion usually comes from mixing up two different things: reporting and withholding. Reporting means the bank tells the IRS what you earned. Withholding means the bank takes money out of your account to pay taxes on your behalf. Banks report interest. They do not withhold it from savings accounts (though they do withhold from some other products, which we'll cover below).
Key Takeaways
- Banks report savings interest to the IRS on a 1099-INT form, but they do not remove tax money from your account.
- You owe federal income tax on all interest your savings earns, regardless of the amount, and you report it when you file your tax return.
- Some states tax savings interest as part of state income tax, while others do not — this varies by where you live.
- Interest under $10 may not generate a 1099-INT, but you still owe tax on it if your state requires it or if your total income crosses certain thresholds.
- Certificates of deposit (CDs) and money market accounts follow the same reporting rules as regular savings accounts.
When the bank sends interest information to the IRS
Your bank generates a 1099-INT for each calendar year and mails it to you by January 31 of the following year. This form shows the total interest you earned in that account during the previous year. The bank also sends a copy to the IRS.
The threshold for sending a 1099-INT is $10 in interest. If you earned $9.50, the bank may not send you a form. However, you still owe tax on that $9.50 if your state taxes interest or if your total income puts you in a taxable situation. The IRS expects you to report all interest, whether or not you receive a 1099-INT.
If you have multiple savings accounts at the same bank, the interest from all of them appears on a single 1099-INT. If you have accounts at different banks, each bank sends its own form.
Federal income tax on savings interest
Interest is taxed as ordinary income, which means it is added to your wages, self-employment income, and any other money you earned that year. Your tax rate on that interest depends on your total income and your filing status — not on the interest amount alone.
If you earned $500 in interest and you are in the 22% tax bracket, you do not automatically owe $110. Instead, that $500 is added to your other income, and you calculate your total tax owed based on where your combined income falls. The marginal rate (the rate on your last dollar of income) is what applies to the interest.
You report the interest on your tax return. If you file Form 1040, interest goes on Schedule 1 (Other Income). If you use tax software, it usually walks you through entering the 1099-INT information. If you use a tax preparer, bring the form with you.
State income tax on savings interest
Whether you owe state tax on savings interest depends entirely on your state. Most states that have an income tax tax savings interest the same way the federal government does. A few states do not tax interest income at all.
States that do not tax interest income include Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming. If you live in one of these states, you owe no state tax on your savings interest, though you still owe federal tax. If you live elsewhere, check your state's tax agency website or ask a tax preparer whether interest is taxable in your state.
Some states have special rules for retirees or for interest below a certain amount. These rules vary widely, so if you are retired or your interest is very small, it is worth confirming with your state before assuming you owe nothing.
Interest withholding on other bank products
Savings accounts themselves do not have interest withheld. However, some other bank products do. The most common is a CD (certificate of deposit) that is held in an IRA or other retirement account. When you withdraw money early from an IRA CD, the bank withholds 20% of the earnings for federal tax purposes.
Regular (non-retirement) CDs do not have withholding. The interest is reported on a 1099-INT just like savings account interest, and you owe tax when you file your return.
Money market accounts are treated the same as savings accounts for tax purposes. Interest is reported, not withheld.
What happens if you don't report the interest
The IRS receives a copy of every 1099-INT your bank sends. If you do not report the interest on your tax return, the IRS will notice the discrepancy. The agency matches 1099 forms to tax returns automatically.
If the interest is small (under $100), the IRS may send you a notice asking you to file an amended return. If the interest is larger or if you have a pattern of unreported income, you may face penalties and interest charges on the unpaid tax. The penalty for not reporting income is usually 20% of the unpaid tax, plus interest calculated from the original due date.
If you genuinely cannot pay the tax owed, you can set up a payment plan with the IRS. This is better than not reporting at all, because it shows good faith and limits the penalties.
How high interest savings accounts affect your taxes
A high-yield savings account earns more interest than a traditional savings account, sometimes 4% to 5% annually instead of 0.01%. This means you will owe more tax on the interest, but the account itself is not taxed differently. The interest is still reported on a 1099-INT and taxed as ordinary income.
If you have $10,000 in a high-yield account earning 5%, you earn $500 per year in interest. You owe federal income tax on that $500 (and state tax, depending on where you live). The bank does not remove any of that $500 from your account. You pay the tax when you file your return or through quarterly estimated tax payments if you have other self-employment income.
Some people move money to high-yield accounts specifically because the interest helps offset inflation. The tax on that interest is a real cost to consider, but it does not change how the reporting works.
Frequently Asked Questions
Do I have to report interest if I earned less than $10?
The bank may not send you a 1099-INT if you earned less than $10, but you still owe tax on it if your state taxes interest or if your total income requires you to file a return. It is safer to report all interest, even small amounts, to avoid questions from the IRS.
Can I deduct savings account fees from the interest I report?
No. You report the full interest amount on your tax return. Savings account fees are not deductible for most people. If you had investment-related fees (which are rare for savings accounts), you might be able to deduct them, but this requires itemizing deductions and meeting a high threshold, so it rarely helps.
What if I moved money between banks mid-year?
Each bank reports only the interest earned in accounts you held with them. If you had $5,000 at Bank A for six months earning $100 in interest, and then moved it to Bank B for six months earning $120, Bank A sends a 1099-INT for $100 and Bank B sends one for $120. You report both on your tax return.
Do joint savings accounts get taxed differently?
A joint account earns interest just like a single account, and the bank reports the full interest amount on a 1099-INT. How you split the tax liability between the two account holders is a matter between you and your tax preparer. The IRS does not automatically split it 50/50 — you can report it however you and the other owner agree.
Is the interest taxed when I earn it or when I withdraw the money?
Interest is taxed in the year you earn it, not when you withdraw it. If you earned $200 in interest in 2024, you owe tax on it in 2024, even if you do not touch the account until 2025. This is called the accrual method, and it applies to all savings accounts.