You pay taxes on interest your savings account earns, not on the money you deposit
The money you put into your savings account is yours — you do not pay income tax on it. But when your bank pays you interest (the small amount of money the bank gives you for letting them use your deposits), that interest counts as income, and you owe federal income tax on it.
The amount of tax you owe depends on how much interest you earned and your overall income for the year. Your bank will send you a form in January showing exactly how much interest you made, and you report that number on your tax return.
State and local taxes work the same way — you pay tax on the interest, not the deposit. A few states do not tax interest income at all, but most do.
Key Takeaways
- You do not pay tax on money you deposit into your savings account, only on the interest the bank pays you.
- Your bank sends you a Form 1099-INT in January showing all interest earned during the previous year, which you report on your federal tax return.
- Interest income is taxed at your regular income tax rate, which depends on your total income for the year.
- Most states tax savings account interest, though a handful do not — check your state's rules if you live in one that might not.
How your bank reports interest to the IRS
In early January, your bank mails you a Form 1099-INT (or sends it electronically if you signed up for that). This form lists every cent of interest you earned in the previous calendar year. The bank sends a copy to the IRS at the same time.
You do not have to do anything with this form except keep it and use the number on it when you file your taxes. If you use tax software or work with a tax preparer, you enter the interest amount from the 1099-INT into your return.
If you earned less than $10 in interest during the year, your bank may not send you a 1099-INT, but you still owe tax on that interest if you file a return. Check your account statements to find the exact amount.
When interest is small enough that you might not owe tax
Whether you actually owe federal income tax on your interest depends on your total income and your filing status. The IRS sets a standard deduction — an amount of income you can earn without owing tax. If your total income (including your interest) is below that threshold, you do not owe federal tax.
For 2024, the standard deduction is around $14,000 for a single person and $28,000 for a married couple filing jointly, though these numbers change each year. If you earned $200 in interest and your other income was $10,000, your total would be $10,200 — still below the standard deduction, so you would not owe federal tax.
However, you may still need to file a return for other reasons, such as to claim a refund of taxes withheld from a paycheck. A tax preparer or free tax software can tell you whether you are required to file.
How much tax you pay on interest
Interest is taxed at your regular income tax rate, not at a special rate. If you are in the 12% tax bracket, you pay 12% of your interest as tax. If you are in the 22% bracket, you pay 22%.
Your tax bracket depends on your total income for the year — wages, self-employment income, interest, dividends, and anything else you earned. The more income you have, the higher your bracket and the more tax you pay on each dollar of interest.
This is different from long-term capital gains, which have their own lower tax rates. Savings account interest is always taxed as ordinary income.
State and local taxes on savings interest
Most states tax interest income the same way the federal government does — as ordinary income at your state tax rate. A few states do not tax interest at all: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming have no state income tax. New Hampshire and Tennessee tax only interest and dividend income, not wages.
If you live in a state with income tax, you report your interest on your state return the same way you do on your federal return — using the 1099-INT your bank sends you.
Some cities also tax income. If you live in a city with a local income tax (common in Ohio, Pennsylvania, and a few other places), you may owe local tax on your interest as well. Your tax software or preparer will guide you through reporting it.
High-yield savings accounts and tax
A high-yield savings account earns more interest than a regular savings account, which means you will receive more interest income to report on your taxes. The tax rules are identical — you still report it on a 1099-INT and pay tax at your regular rate.
If you earned $500 in interest from a high-yield account instead of $50 from a regular account, you report $500 on your tax return instead of $50. The percentage of tax you pay stays the same; the dollar amount is just higher.
Some people move money to high-yield accounts specifically because the extra interest helps offset the tax cost, but the interest is still taxable income.
What to do if you did not receive a 1099-INT
If you earned interest but your bank did not send you a 1099-INT, contact the bank and ask for one. Banks are required to send them for any account that earned $10 or more in interest during the year.
If the bank says you earned less than $10, ask for a statement showing the exact amount. You still owe tax on that interest even without a 1099-INT — you just have to calculate it yourself from your statements.
If you cannot reach the bank or it refuses to provide the information, you can report the interest based on your account statements. Keep those statements in case the IRS asks questions later.
Frequently Asked Questions
Do I have to file a tax return if I only earned interest and nothing else?
Only if your interest income exceeds the standard deduction for your filing status. For 2024, that is roughly $14,000 for a single person. If you earned $500 in interest and had no other income, you would not be required to file. However, if taxes were withheld from other sources, you may want to file to get a refund.
Can I avoid taxes by keeping my money in a savings account instead of investing it?
No. Any interest your savings account earns is taxable income, regardless of how small the amount is. The tax rate is the same whether you earn interest in a savings account or through investments — it depends on your total income for the year, not where the money comes from.
What if I have multiple savings accounts at different banks?
Each bank sends you a separate 1099-INT for the interest earned at that bank. You add up all the interest from all your accounts and report the total on your tax return. The IRS receives copies of all your 1099-INTs, so they will know if you forget to report one.
Do I owe taxes on interest if I withdraw the money before the year ends?
Yes. You owe tax on all interest earned during the calendar year, whether you withdraw it, leave it in the account, or transfer it elsewhere. The tax is based on when the interest was earned, not when you move the money.
Is there a way to reduce the tax I pay on savings interest?
Not directly — interest income is taxed at your regular rate. However, if your income is low enough to fall below the standard deduction, you will not owe federal tax. Some people also use tax-advantaged accounts like IRAs, which have different rules, but those are separate from regular savings accounts.