You only owe federal income tax on interest your savings account earns, not on the money you deposit

The deposits you make into your savings account are not taxable income—you already paid tax on that money when you earned it. But the interest the bank pays you is taxable income in the year you receive it, even if you leave it in the account and don't withdraw it. The IRS treats interest the same way it treats wages or other income.

Whether you actually have to report it depends on how much interest you earned. If your savings account earned less than $10 in interest during the year, you do not have to report it. If it earned $10 or more, you must report it on your federal tax return. Some states also tax savings interest, but the threshold and rules vary by state.

Key Takeaways

  • Interest earned on savings is taxable income, but deposits you make are not.
  • You must report interest of $10 or more on your federal tax return; below that threshold, reporting is optional.
  • Your bank will send you a Form 1099-INT if you earned $10 or more in interest during the year.
  • State tax rules on savings interest vary; some states tax it and some do not.
  • Interest is reported on Schedule 1 (Form 1040) or on a separate schedule depending on your return type.

How the IRS knows about your savings interest

Banks report interest payments to the IRS using a form called Form 1099-INT. Your bank will mail or email you a copy by January 31 of the year after you earned the interest. The form shows the total interest you received from that bank during the previous year.

If you earned $10 or more in interest at any single bank, that bank must send you a 1099-INT. If you earned less than $10, the bank may still send one, but is not required to. Either way, the IRS receives a copy of every 1099-INT issued, so they know what interest was paid to you.

If you have savings accounts at multiple banks, each bank sends its own 1099-INT. You add up the interest from all of them when you report your total on your tax return.

Where to report savings interest on your tax return

If you file Form 1040 (the standard federal income tax return), you report interest income on Schedule 1, Part I, Line 8. You then transfer that amount to Form 1040 itself. If your total interest is $1,500 or less and you have no other investment income, you can report it directly on Form 1040 without filing Schedule 1, depending on your filing status and other factors—your tax software will guide you.

The interest goes into your total income for the year, which means it can push you into a higher tax bracket or affect other parts of your return, such as whether you owe the net investment income tax or whether you remain under income limits for certain credits.

If you file a simpler return (Form 1040-SR for seniors, or certain other forms), the location may differ slightly, but the principle is the same: interest is reported as income.

State taxes on savings interest

Most states that have an income tax also tax interest income. A few states—including Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming—have no state income tax at all, so you owe no state tax on savings interest there. New Hampshire and Tennessee tax only interest and dividends, not wages.

If you live in a state with income tax, you will report your savings interest on your state return in much the same way you report it to the federal government. Your state tax form will have a line for interest income. Some states use the same threshold as the federal government ($10), while others have different rules. Check your state's tax authority website or your state tax form instructions for the specific threshold and reporting requirement.

If you moved during the year or lived in more than one state, you may owe tax to multiple states. Some states offer credits for taxes paid to other states to prevent double taxation, but you have to claim them.

What happens if you don't report savings interest

If you earned $10 or more in interest and did not report it, the IRS will likely catch it because they received a copy of your 1099-INT from the bank. The IRS matches 1099s to tax returns and flags mismatches. You may receive a notice asking you to pay the tax owed, plus interest and possibly a penalty.

The penalty for not reporting income is usually 20% of the unpaid tax, though it can be lower if you have reasonable cause. Interest accrues on the unpaid tax from the original due date. If the amount is small, the IRS may not pursue it aggressively, but it is still technically a violation.

If you realize you missed reporting interest in a prior year, you can file an amended return (Form 1040-X) for that year. Filing an amended return voluntarily is much better than waiting for the IRS to contact you, because it shows good faith and may reduce or eliminate penalties.

High-yield savings accounts and interest reporting

High-yield savings accounts pay significantly more interest than traditional savings accounts—sometimes 4% or more annually, depending on the market. This means you are more likely to cross the $10 reporting threshold, and the amount you owe in tax will be larger.

For example, if you have $10,000 in a high-yield account earning 4.5% annually, you would earn $450 in interest, which you must report. At a 22% federal tax bracket, that interest would cost you roughly $99 in federal tax. State tax would be additional if your state taxes interest.

Some people use high-yield savings accounts specifically because the interest rate is higher, but remember that the interest is still taxable income. The tax does not reduce the benefit of the higher rate, but it does mean your actual after-tax return is lower than the advertised rate.

Frequently Asked Questions

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

No, you do not have to report interest under $10 on your federal return. However, if your state taxes interest and has a lower threshold, you may need to report it to your state. Check your state's rules to be sure.

What if I have multiple savings accounts at different banks?

You add up the interest from all accounts and report the total on your tax return. Each bank sends you its own 1099-INT, so gather all of them before you file. If the total is $10 or more, you must report it.

Can I deduct savings account fees from the interest I report?

No. You report the gross interest the bank paid you, not the net after fees. However, certain investment-related expenses may be deductible under other rules, though this is rare for savings accounts. Consult a tax professional if you have significant fees.

Do I owe tax on interest I earned but didn't withdraw?

Yes. The IRS taxes interest in the year you earned it, regardless of whether you withdrew it. If you left the interest in the account, you still owe tax on it that year.

What if my bank didn't send me a 1099-INT but I earned interest?

If you earned $10 or more, the bank should have sent one by January 31. Contact the bank and ask for a copy. If the bank cannot provide one, you can still report the interest based on your own records (your account statements). The IRS has a copy from the bank, so reporting it protects you.