Yes, you owe federal income tax on the interest your savings account earns
Any interest your bank pays you is taxable income. The IRS treats it the same way it treats wages from a job — you have to report it on your tax return and pay income tax on it. This is true whether you earn $5 in interest or $500. The bank will send you a form called a 1099-INT at the end of the year listing how much interest you earned, and you use that number when you file your taxes.
The amount of tax you actually owe depends on your total income and your tax bracket — the higher your income, the higher the percentage of that interest goes to taxes. But the interest itself is always taxable, even if the amount is small.
Key Takeaways
- Banks report savings account interest to the IRS on a 1099-INT form, and you must include that amount on your tax return.
- The interest is taxed as ordinary income at your regular income tax rate, not at a special lower rate.
- You owe taxes on interest even if the bank does not withhold any money — the tax bill is still yours to pay.
- Some savings accounts earn so little interest that the tax impact is minimal, but the reporting requirement still applies.
How the bank reports your interest to the IRS
In January or early February of each year, your bank mails or emails you a 1099-INT form. This form shows how much interest you earned in the previous calendar year. The bank sends a copy to the IRS at the same time, so the IRS already knows about your interest income before you file your return.
You do not have to do anything to receive the 1099-INT — the bank sends it automatically if you earned at least $10 in interest during the year. If you earned less than $10, the bank may not send a form, but you still owe tax on that interest if you have any tax liability at all.
When you file your tax return, you report the interest amount from the 1099-INT on your return. If you have multiple savings accounts or other interest-bearing accounts, you will receive multiple 1099-INT forms, and you add all of them together on your return.
What tax rate applies to your savings interest
Savings account interest is taxed as ordinary income, which means it is taxed at the same rate as your wages or salary. It does not get a special lower rate. If you are in the 22% tax bracket, your interest is taxed at 22%. If you are in the 12% bracket, it is taxed at 12%.
Your tax bracket depends on your total income for the year — wages, self-employment income, interest, dividends, and other sources all add together. The more you earn from all sources, the higher your bracket and the more tax you owe on the interest.
This is different from long-term capital gains or may have access to dividends, which can be taxed at lower rates. Interest from a savings account does not get that treatment.
Whether the bank withholds taxes from your interest
Banks do not automatically withhold taxes from the interest they pay you. The interest is deposited into your account in full, and you are responsible for setting aside money to pay the taxes when you file your return. This is different from a paycheck, where your employer withholds taxes before you receive the money.
Because no money is withheld, you may owe taxes even though you never saw a tax payment come out of your account. If you earn $100 in interest and are in the 22% bracket, you owe $22 in taxes, but the bank deposited the full $100 into your account. You have to pay that $22 when you file.
If you expect to owe a large amount of tax and want the bank to withhold it, you can request withholding on your 1099-INT form, though most people do not do this.
When you do not have to report interest income
If you earned less than $10 in interest during the year, the bank will not send you a 1099-INT form. However, you may still owe tax on that interest depending on your total income and filing status. The $10 threshold is just when the bank is required to send the form — it is not a tax threshold.
If you are required to file a tax return based on your income and filing status, you should report all interest you earned, even if it is less than $10 and you did not receive a 1099-INT. The IRS expects you to report it.
If you are not required to file a tax return at all — for example, if your total income is below the filing threshold for your age and filing status — then you do not have to report the interest. But most people who have a job or other income do have to file.
How high-yield savings accounts affect your taxes
High-yield savings accounts earn more interest than traditional savings accounts, sometimes significantly more. This means you will owe more in taxes on the interest. If a regular savings account earns 0.01% and a high-yield account earns 4.5%, the difference in your tax bill can be substantial.
The higher interest is still worth it for many people because the after-tax earnings are still better than a traditional account. But you should factor in the tax cost when comparing accounts. If you earn $450 in interest from a high-yield account and you are in the 22% bracket, you owe about $99 in taxes, leaving you with $351 in actual gain.
Some people keep money in high-yield savings accounts in tax-advantaged accounts like IRAs or 401(k)s, where the interest is not taxed each year. If you have that option, it can be a way to earn higher interest without paying annual taxes on it.
State and local taxes on savings interest
In addition to federal income tax, you may owe state or local income tax on your savings interest. Most states that have an income tax treat interest the same way the federal government does — as ordinary income taxed at your state rate.
A few states do not have an income tax at all, so residents of those states owe only federal tax on interest. If you live in a state with income tax, check your state's rules or ask a tax preparer, because the state rate varies and the rules for what counts as taxable interest can differ slightly from federal rules.
Frequently Asked Questions
Do I have to file a tax return if I only earned interest and no other income?
It depends on how much interest you earned and your age. If your only income is interest and it is below the filing threshold for your filing status and age, you do not have to file. For 2024, the threshold for a single person under 65 is around $14,000 in income. Check the IRS website or ask a tax preparer for the exact threshold that applies to you.
What if I earned interest in a joint account — do I owe tax on all of it?
The bank reports the full interest amount on a 1099-INT, but you only owe tax on your share of the interest. If the account is truly joint and you each own half, you each report half the interest on your own tax return. You may need to provide documentation to the IRS if they question why your 1099-INT amount does not match what you reported.
Can I deduct savings account fees from the interest I report?
No. You report the full interest amount shown on the 1099-INT, even if the bank charged you fees. You cannot reduce the taxable interest by subtracting fees. However, in some cases investment-related expenses can be deducted separately on your tax return — ask a tax preparer whether your situation qualifies.
What happens if I do not report the interest on my tax return?
The IRS receives a copy of your 1099-INT from the bank, so they know about the interest. If you do not report it, the IRS will likely send you a notice asking why the amount on your return does not match what the bank reported. You will owe the tax plus penalties and interest on the unpaid amount.