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

The deposits you put into your savings account are not taxable—that is money you already earned and paid taxes on. The interest the bank pays you is taxable income. If your savings account earned $10 in interest last year, you owe federal income tax on that $10, just as you would on $10 from a paycheck or a side job.

The bank reports this interest to the IRS on a form called a 1099-INT (Interest Income). You receive a copy, and you report it on your tax return. The amount of tax you owe depends on your tax bracket—the higher your total income, the higher the percentage you pay on that interest.

Some states also tax savings interest, and some do not. A few states exempt interest income entirely for residents over a certain age. Your state's tax department website will tell you whether your state taxes savings interest.

Key Takeaways

  • Interest earned in a savings account is taxable federal income and must be reported on your tax return.
  • The bank sends you a 1099-INT form showing the interest you earned, and sends a copy to the IRS.
  • State taxes on savings interest vary—some states do not tax it, and a few exempt it for older residents.
  • You do not pay tax on the money you deposit, only on the interest the bank pays you.
  • If you earned less than $10 in interest, the bank may not send a 1099-INT, but you still owe tax on it if you file a return.

How the IRS finds out about your interest income

Banks are required to report interest to the IRS automatically. If your account earned $10 or more in interest during the year, the bank sends a 1099-INT form to both you and the IRS by January 31 of the following year. The IRS then matches what the bank reported against what you report on your tax return.

If you do not report the interest and the IRS sees it on the bank's report, you will receive a notice asking you to pay the tax you owe, plus penalties and interest. This is one of the easiest discrepancies for the IRS to catch because the bank's records are electronic and automatic.

Even if you earned less than $10 in interest and the bank does not send a 1099-INT, you are still required to report it if you file a tax return. The threshold for the bank to send the form is $10, not the threshold for you to owe tax.

When a high-yield savings account changes your tax picture

A high-yield savings account pays significantly more interest than a traditional savings account—sometimes 4% to 5% annually, compared to 0.01% or less at many large banks. This higher interest is taxable the same way, but the dollar amount is much larger.

If you have $10,000 in a high-yield account earning 4.5%, you earn $450 in interest per year. That $450 is fully taxable income. If you are in the 22% federal tax bracket, you owe roughly $99 in federal tax on that interest alone. State taxes would be additional.

This is not a reason to avoid high-yield accounts—the after-tax return is still better than a traditional savings account. But it means you should not be surprised when you receive a 1099-INT for a larger amount than you expected, or when your tax bill is higher because of the interest income.

Tax-advantaged alternatives if interest income is a concern

If you want to save money and reduce taxable interest income, you have options that are not taxed the same way. A Roth IRA lets you save up to $7,000 per year (for 2024), and the interest and growth inside it are never taxed, even when you withdraw it in retirement. A traditional IRA lets you deduct your contributions from your taxable income in the year you make them, though you pay tax when you withdraw the money later.

A 529 college savings plan lets you save for education expenses, and the interest is not taxed as long as you use the money for may have access to education costs. Treasury bonds and I Bonds (savings bonds issued by the U.S. government) have different tax treatment—I Bonds are not taxed at the state level, and you can defer federal tax until you cash them in.

These are not ways to avoid paying tax on savings—they are ways to structure savings so the tax is deferred, reduced, or eliminated under specific conditions. A tax professional can tell you which makes sense for your situation.

What to do when you receive your 1099-INT

The bank sends your 1099-INT by January 31. Check it for accuracy—make sure the interest amount matches what you see in your account statements. If there is an error, contact the bank and ask them to issue a corrected form.

When you file your tax return, you report the interest income on Schedule 1 (Form 1040), line 8, under "Interest." If you use tax software, it will ask you for this information and put it in the right place. If you file by hand or with a tax professional, give them the 1099-INT.

Keep your 1099-INT and your bank statements for at least three years. The IRS can audit returns from the past three years, and you will need these documents to prove the interest amount if they question it.

Frequently Asked Questions

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

The bank does not have to send you a 1099-INT if you earned less than $10, but you are still required to report it on your tax return if you file one. Keep your bank statements as proof of the amount.

What if I have multiple savings accounts at different banks?

Each bank sends its own 1099-INT for the interest earned at that bank. You report all of them on your tax return. Add them together on Schedule 1, line 8. The IRS receives copies from each bank, so they will see the total anyway.

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. Savings account fees are not deductible on your personal tax return. You pay tax on the full interest amount.

Does a joint savings account change who pays tax on the interest?

The bank reports the full interest amount on a 1099-INT, but it goes to whoever is listed first on the account. You and the account holder need to decide how to split the tax liability and report it correctly on your individual returns. This is a situation where a tax professional can help you avoid mistakes.

What if the bank made an error on my 1099-INT?

Contact the bank when ready and ask for a corrected form. The bank will issue a corrected 1099-INT and send it to both you and the IRS. File your tax return using the corrected amount. Keep both the original and corrected forms for your records.