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

The money you put into your savings account is yours—you do not owe tax on it. But the interest the bank pays you counts as income. The IRS treats it the same way it treats wages or freelance earnings. Your bank will report this interest to the IRS on a form called a 1099-INT, and you report it on your tax return.

How much tax you actually owe depends on your total income for the year and your tax bracket. If your savings account earned $50 in interest and that is your only income source, you will owe tax on that $50. If you earned $60,000 in wages plus $50 in interest, you owe tax on the full $60,050. The interest does not get special treatment—it stacks on top of your other income.

Some savings accounts earn so little interest that the amount is below the threshold the IRS requires you to report. For 2024, banks do not have to send you a 1099-INT unless the interest was $10 or more. But even if your bank does not send a form, you still owe tax on any interest you earned.

Key Takeaways

  • Interest earned in a savings account is taxable income and must be reported on your federal tax return.
  • Your bank will send you a 1099-INT form if you earned $10 or more in interest during the year.
  • State and local income taxes may also explore to savings interest, depending on where you live.
  • High-yield savings accounts earn more interest, which means you will owe more in taxes on that interest.
  • You do not pay tax on the principal (the money you deposited), only on the earnings.

How the 1099-INT form works and when you receive it

Banks send the 1099-INT to you and to the IRS by January 31 of the year after you earned the interest. If you earned interest in 2024, you will receive the form in January 2025. The form shows the total interest the bank paid you during that calendar year.

You use this form to fill out your tax return. You report the amount from the 1099-INT on Schedule B (Interest and Ordinary Dividends) if you have other investment income, or directly on Form 1040 if it is your only interest income. The IRS already has a copy of the form, so they will know if you do not report it.

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

State and local taxes on savings interest

Most states tax savings interest as regular income. If you live in a state with income tax, you will report the same interest amount on your state return. A few states do not have income tax at all—Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming—so residents of those states do not owe state tax on savings interest.

Some states offer tax breaks for interest earned on savings, but these are rare and usually come with income limits or age requirements. New Hampshire and Tennessee, for example, tax only dividend and interest income, not wages. Check your state's tax website or a tax professional to know what applies where you live.

Local income taxes exist in some cities and counties, usually in Ohio, Pennsylvania, and a few other states. If your city or county has an income tax, savings interest is typically taxable there too.

How high-yield savings accounts change your tax picture

A high-yield savings account earns significantly more interest than a traditional savings account—sometimes 4% to 5% annually, compared to 0.01% or less at many big banks. This means more interest income, which means a larger tax bill.

If you have $10,000 in a high-yield account earning 4.5%, you will earn about $450 in interest over a year. You will owe federal income tax on that $450, plus state and local tax if applicable. At a 22% federal tax bracket, that is roughly $99 in federal tax alone. A traditional savings account earning 0.01% on the same $10,000 would generate $1 in interest and almost no tax.

This does not mean high-yield accounts are a bad choice—you still come out ahead because you earn more interest than you pay in tax. But it is important to factor the tax cost into your decision if you are comparing accounts.

What happens if you do not report savings interest

The IRS matches the 1099-INT forms banks send to them against the tax returns people file. If your return does not show the interest income your bank reported, the IRS will notice. They may send you a notice asking you to explain the discrepancy or file an amended return.

If you owe tax and do not pay it, the IRS can charge penalties and interest on top of the original tax bill. The penalty for not reporting income is usually 20% of the unpaid tax, plus interest that compounds daily. Over time, this becomes much more expensive than the original tax would have been.

If the interest amount is small and the omission was an honest mistake, the IRS sometimes waives penalties if you file an amended return quickly. But the safest approach is to report all interest income when you file, even if the amount is small.

Tax-advantaged accounts that do not trigger interest taxes

Certain accounts let you earn interest or investment returns without paying federal income tax on them, at least in the short term. A Roth IRA or Roth 401(k) lets you withdraw money tax-free in retirement, including all the interest and growth. A traditional 529 college savings plan grows tax-free as long as you use the money for education expenses.

These accounts have rules about when you can withdraw money and how much you can contribute each year. But if you are saving for retirement or education and want to avoid paying annual tax on interest, these are worth exploring. A tax professional or financial advisor can help you figure out which account makes sense for your situation.

Regular savings accounts do not have these tax breaks, so if you are holding money in a savings account for general purposes, you will owe tax on the interest no matter what.

Frequently Asked Questions

Do I have to report savings interest if the amount is very small?

Yes. Even if your bank does not send a 1099-INT because the interest was under $10, you still owe tax on any interest you earned. The IRS requires you to report all income, regardless of the amount. However, if the interest is a few dollars, the tax owed will be minimal.

What if I have savings accounts at multiple banks?

Each bank sends its own 1099-INT. You add up the interest from all of them and report the total on your tax return. If you have accounts at five banks, you will receive five separate 1099-INT forms, but you report one combined number on Schedule B.

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

No. You report the gross interest the bank paid you, not the interest minus fees. However, some investment-related fees may be deductible on Schedule A if you itemize deductions, though this is rare for most people. A tax professional can tell you if any of your fees may have access to.

Does a joint savings account change how I report interest?

If the account is jointly owned, the bank will split the interest between the owners on the 1099-INT forms they send. Each owner reports their portion on their own tax return. Make sure the bank has the correct Social Security numbers for both owners so the forms go to the right people.

What if I closed my savings account during the year?

You still owe tax on all the interest earned in that account up to the date you closed it. The bank will report the interest on a 1099-INT, and you report it on your tax return for that year. Closing the account does not change your tax obligation.