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

The money you put into a savings account is yours — you do not owe tax on it. But the interest the bank pays you is income, and the IRS treats it the same way it treats wages or other earnings. If your account earns interest, you report that interest on your tax return.

The threshold for reporting is low. If you earned $10 or more in interest during the year, the bank sends you a Form 1099-INT in January. You use that form to report the interest on your federal tax return. Some states also tax interest income, though the rules vary by state.

The tax you owe depends on your total income and your tax bracket. Interest is taxed as ordinary income, not at a special rate. If you are in the 22% tax bracket, interest is taxed at 22%. If you are in the 12% bracket, it is taxed at 12%.

Key Takeaways

  • You owe federal income tax on interest your savings account earns, reported on Form 1099-INT when interest reaches $10 or more in a year.
  • The principal you deposit is not taxable — only the interest the bank pays you counts as income.
  • Interest is taxed at your ordinary income tax rate, which depends on your total earnings and filing status.
  • Some states tax interest income and some do not, so check your state's rules if you live in a state with income tax.
  • High-yield savings accounts earn more interest, which means you owe more tax on that interest.

How the IRS knows about your interest

Banks report interest to the IRS automatically. If your account earned $10 or more in interest during the calendar year, your bank generates a Form 1099-INT and mails it to you by January 31. The bank also sends a copy to the IRS.

You do not have to wait for the form to report the interest. You can look at your account statements and add up the interest yourself. But most people use the 1099-INT because it is the official record the IRS already has.

If you earned less than $10 in interest, the bank does not send a 1099-INT, but you still owe tax on that interest if you have any tax liability at all. You report it on your return based on your statements.

The difference between savings accounts and money market accounts

A money market account works the same way as a savings account for tax purposes. Interest earned is taxable income, reported on Form 1099-INT. The rate is usually higher than a regular savings account, so you earn more interest and owe more tax.

Certificates of deposit (CDs) also generate taxable interest. You report the interest in the year you earn it, even if the CD has not matured yet. If you cash out a CD early and pay a penalty, you can deduct that penalty from the interest income on your return.

State income tax on savings interest

Thirty-seven states have income tax. Most of them 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.

If you live in a state with income tax, check your state's tax authority website or ask a tax preparer whether interest is taxed. Some states have special rules for retirees or low-income filers. If you live in a state without income tax — such as Florida, Texas, or Wyoming — you owe no state tax on interest, only federal.

How high-yield savings accounts affect your tax bill

High-yield savings accounts pay significantly more interest than traditional savings accounts. A traditional account might pay 0.01% annually, while a high-yield account pays 4% to 5%. That difference means much more taxable income.

If you have $10,000 in a high-yield account earning 4.5%, you earn $450 in interest per year. That $450 is taxable income. If you have the same $10,000 in a traditional account earning 0.01%, you earn $1 in interest — below the reporting threshold.

This does not mean high-yield accounts are a bad choice. You still come out ahead because the interest you earn, even after taxes, is more than you would earn elsewhere. But it is worth understanding that the higher rate means a larger tax bill.

What happens if you do not report interest income

The IRS receives a copy of every 1099-INT your bank sends. If you do not report the interest on your return, the IRS will notice the discrepancy. The agency matches 1099s to tax returns automatically.

If you underreport income, you may owe back taxes plus interest and penalties. The penalty for negligence is usually 20% of the underpaid tax. It is simpler and cheaper to report the interest when you file.

Strategies to reduce interest income tax

You cannot avoid tax on interest, but you can structure your savings to minimize it. One approach is to keep high-yield savings in tax-advantaged accounts like a traditional IRA or 401(k), where interest grows without triggering annual tax.

Another option is to use a Roth IRA, where interest and growth are tax-free as long as you follow the withdrawal rules. If you have a large amount to save, a financial advisor can discuss which account type makes sense for your situation.

Some people use a mix of accounts — tax-advantaged retirement accounts for long-term savings, and regular savings accounts for emergency funds. The interest on the emergency fund is taxable, but the amount is usually small.

Frequently Asked Questions

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

The bank does not send a 1099-INT for interest under $10, but you still owe tax on it if you have any tax liability. Report it based on your account statements. Most people with very small interest amounts have no tax liability anyway, so it does not matter in practice.

What if I earned interest in multiple accounts?

Add up all the interest from all your accounts. Each bank sends a separate 1099-INT, but you report the total interest on one line of your tax return. The IRS receives all the 1099s, so make sure your total matches.

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

No. You report the full interest amount on your return. Fees are not deductible against interest income. However, if you paid investment advisory fees or tax preparation fees related to managing your savings, those may be deductible under other rules — ask a tax preparer.

Does a joint savings account change how I report interest?

If the account is jointly owned, the bank may split the 1099-INT between the two owners, or it may issue the full amount to one owner. Check the form and coordinate with the other owner so you both report the correct amount. If the split is wrong, you can ask the bank to issue a corrected form.

What if I closed my savings account mid-year?

You still owe tax on the interest earned up to the closing date. The bank includes that interest on the 1099-INT for the year you closed the account. Report it on your return for that year.