Yes, you owe federal income tax on savings account interest

The interest your bank pays you counts as taxable income. The IRS treats it the same way it treats wages or salary—you report it on your tax return and pay tax at your ordinary income tax rate. This applies to all savings accounts: regular savings, money market accounts, certificates of deposit (CDs), and high-yield savings accounts.

Your bank will send you a form called a 1099-INT (Interest Income) by January 31 each year if you earned $10 or more in interest during that year. You use this form to report the interest on your federal tax return. Some states also tax savings interest, though a few states exempt it entirely.

The amount you owe depends on your total income and your tax bracket. Someone in the 22% tax bracket pays roughly 22 cents in federal tax for every dollar of interest earned. Someone in the 12% bracket pays roughly 12 cents per dollar. State tax, if your state has it, stacks on top of that.

Key Takeaways

  • Savings account interest is taxable income at the federal level and in most states, reported on Form 1099-INT if you earn $10 or more per year.
  • You pay tax at your ordinary income tax rate, which depends on your total income and filing status, not at a special rate for interest.
  • Your bank reports the interest to the IRS automatically, so you must report it on your tax return even if you don't receive a 1099-INT.
  • High-yield savings accounts earn more interest than traditional savings accounts, which means higher tax liability—but the after-tax return is usually still better.
  • You cannot avoid the tax by moving money between accounts or banks; the IRS taxes interest based on when it was earned, not when you withdrew it.

When your bank sends you the 1099-INT form

Your bank issues a 1099-INT if your interest earnings reach $10 or more during the calendar year. The form arrives by January 31 and shows the total interest paid to you in that account during the previous year. If you have multiple savings accounts at different banks, each bank sends its own 1099-INT.

You are required to report all interest income on your tax return, even if you don't receive a 1099-INT. If you earned $8 in interest at one bank and $7 at another, you still owe tax on the full $15, and you still must report it. The IRS gets a copy of every 1099-INT your bank files, so underreporting is caught during processing.

If you receive a 1099-INT with an incorrect amount, contact your bank when ready. The bank can issue a corrected form (1099-INT with "CORRECTED" printed on it) before the IRS important date, usually in February. Keep the corrected form and file it with your return.

How your tax bracket determines what you actually pay

The tax rate you pay on interest is your marginal tax rate—the rate that applies to your last dollar of income. In 2024, federal tax brackets range from 10% to 37%, depending on your total income and whether you file as single, married filing jointly, or another status. Your interest income is added to your other income (wages, self-employment, investment gains) to determine which bracket you fall into.

Example: If you earn $50,000 in wages and $500 in savings interest, you report $50,500 in total income. That $500 in interest is taxed at whatever rate applies to income between $50,000 and $50,500. For a single filer in 2024, that would be the 22% bracket, so you owe roughly $110 in federal tax on that interest.

State income tax works the same way. If your state taxes interest income, it applies your state tax rate to the interest amount. A few states—including Pennsylvania, Illinois, and Mississippi—do not tax interest income at all, so residents of those states owe only federal tax. Most other states tax it at their ordinary income tax rate, which ranges from roughly 2% to 13% depending on the state.

Why high-yield savings accounts still make sense despite the tax

High-yield savings accounts currently pay 4% to 5% annual interest, while traditional savings accounts at large banks pay 0.01% to 0.05%. The difference is substantial, even after taxes. If you have $10,000 in a high-yield account earning 4.5%, you earn $450 per year in interest. At the 22% federal tax rate, you owe $99 in tax, leaving you $351 after tax. In a traditional account earning 0.01%, you earn $1 and owe roughly $0.22 in tax, leaving you $0.78.

The higher interest rate more than compensates for the higher tax bill. You come out ahead by moving to a high-yield account, even though you owe more tax on the earnings. The after-tax return is what matters—and high-yield accounts win on that measure.

The tax is also not a reason to avoid earning interest. Some people mistakenly think that earning interest pushes them into a higher tax bracket entirely, which is not how tax brackets work. Your tax rate only increases on the income that falls into the higher bracket, not on all your income. Earning $500 in interest will never cost you more than $500 in additional tax.

What happens if you move money between accounts or withdraw early

Moving money from one savings account to another does not change your tax liability. The IRS taxes interest based on when it was earned, not when you moved or withdrew the money. If you earned $200 in interest during the year and then withdrew the entire balance in December, you still owe tax on that $200.

Withdrawing money from a CD before the maturity date usually triggers an early withdrawal penalty, but that penalty is separate from the tax on interest. You still owe income tax on all interest earned, and you also owe the penalty (usually three to six months of interest). The penalty is deductible on your tax return, which reduces your taxable income slightly, but it does not eliminate the tax on the interest itself.

If you close a savings account partway through the year, the bank still reports all interest earned up to that point on your 1099-INT. You cannot avoid reporting it by closing the account early.

How to report savings interest on your tax return

If your total interest income is under $1,500 and you have no other investment income, you report it on Schedule 1 (Form 1040), line 8, under "Interest." You straightforward enter the total amount from your 1099-INT forms.

If your total interest income is $1,500 or more, you must use Schedule B (Interest and Ordinary Dividends) instead. Schedule B requires you to list each account separately and total them. You then transfer the total to Schedule 1.

If you use tax software (TurboTax, H&R Block, TaxAct), you enter the 1099-INT information into the appropriate section, and the software automatically places it on the correct form. If you file by hand or with a tax professional, they handle the placement for you. Either way, the interest must be reported—there is no way to exclude it from your return.

Frequently Asked Questions

Do I owe tax on interest if I earned less than $10?

You owe tax on all interest income, regardless of the amount. Your bank only sends a 1099-INT if you earned $10 or more, but you must report smaller amounts on your return. The IRS expects you to track and report all interest, even $1 or $2.

Can I deduct savings account fees from my interest income?

No. You report the full interest amount on your return and pay tax on it. Fees charged by your bank are not deductible against interest income. However, if you have significant investment expenses (such as fees paid to a financial advisor), you may be able to deduct them under certain conditions—consult a tax professional about your specific situation.

What if my bank reports the wrong amount on the 1099-INT?

Contact your bank when ready and ask for a corrected 1099-INT. The bank will issue a new form marked "CORRECTED" and file it with the IRS. You then file the corrected form with your tax return. If you already filed your return with the incorrect amount, you can file an amended return (Form 1040-X) once you receive the corrected 1099-INT.

Do I owe tax on interest earned in a joint account?

Yes. The interest is split between the account owners based on their ownership percentage, and each owner reports their share on their own tax return. Your bank will issue separate 1099-INT forms to each owner, or one form showing the split. Check your 1099-INT to see how much is attributed to you.

Is savings account interest taxed differently than investment income?

Yes. Savings account interest is taxed as ordinary income at your regular tax rate. Long-term capital gains and may have access to dividends are taxed at lower rates (0%, 15%, or 20% depending on income). This is one reason why some people invest in stocks or bonds instead of keeping all their money in savings—but savings accounts offer safety and liquidity that investments do not.