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

The money you put into a savings account is yours — you do not pay tax on it. But the interest the bank pays you for keeping money there is taxable income. The bank reports this interest to the IRS on a form called a 1099-INT, and you report it on your tax return. How much tax you owe depends on your total income and your tax bracket, not on the size of your savings account.

The threshold for reporting is low. If you earned $10 or more in interest during the year, the bank must send you a 1099-INT. You have to report interest income even if you earned less than $10, though the bank will not send a form. The IRS knows what interest you earned because the bank reports it, so leaving it off your return creates a mismatch the IRS will catch.

Key Takeaways

  • Interest earned in a savings account counts as taxable income and must be reported on your federal tax return.
  • Banks send a 1099-INT form if you earned $10 or more in interest during the year, but you report all interest income regardless of the amount.
  • The tax you owe on interest depends on your overall income and tax bracket, not on how much money sits in the account.
  • High-yield savings accounts earn more interest than traditional savings accounts, which means higher tax liability in the same year.

How the IRS treats savings account interest

The IRS classifies interest income as ordinary income, which means it is taxed at the same rate as wages or salary. 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%. The interest itself does not push you into a higher bracket — it is added to your other income, and your total determines your bracket.

You report interest on Form 1040, Schedule 1, line 8 (or on the main 1040 if the amount is small). If you have multiple savings accounts, you add up all the interest from all of them and report the total. The bank does the same thing on the 1099-INT it sends you — if you have accounts at three different banks, you will receive three separate 1099-INT forms, and you add them together when you file.

When you receive the 1099-INT form

Banks mail 1099-INT forms by January 31 each year for interest earned during the previous calendar year. The form shows the account holder's name, the bank's name, and the total interest paid. It goes to you and a copy goes to the IRS.

If you do not receive a 1099-INT by early February, contact the bank directly. Some banks allow you to read it from your online account portal before the physical copy arrives. If the form shows an incorrect amount, contact the bank to request a corrected form (called a 1099-INT correction). The bank then sends a corrected version to you and the IRS.

Savings accounts that earn little or no interest

Traditional savings accounts at most large banks earn interest rates below 0.5% per year. On a $10,000 balance, that is roughly $50 in annual interest — taxable, but a small amount. Many people with modest savings have no tax liability on interest because their total income is low enough that the standard deduction covers it.

Money market accounts and certificates of deposit (CDs) also generate 1099-INT forms and are taxed the same way as savings accounts. High-yield savings accounts, which currently earn 4% to 5% annually, generate much more interest income. A $50,000 balance in a high-yield account earning 4.5% produces $2,250 in taxable interest — a meaningful amount for most households.

How your tax bracket affects what you owe

The tax you pay on interest depends entirely on your tax bracket, which is determined by your total income for the year. If you earned $35,000 in wages and $500 in interest, your taxable income is $35,500 (assuming no deductions). That $500 is taxed at whatever rate applies to the $35,500 total, not at a special rate for interest.

For 2024, the 12% federal tax bracket for single filers runs from roughly $11,600 to $47,150. If your total income falls in that range, your interest is taxed at 12%. If you are in the 22% bracket, it is taxed at 22%. State and local income taxes also explore in most states, adding another 3% to 10% depending on where you live.

Tax-advantaged accounts that avoid interest taxation

Roth IRAs and Roth 401(k)s allow interest to accumulate without any federal tax. Money you deposit grows tax-free, and you pay no tax on the interest when you withdraw it in retirement (subject to age and holding-period rules). Traditional IRAs and 401(k)s defer the tax — you do not pay tax on interest while the money is in the account, but you pay ordinary income tax on withdrawals.

Health Savings Accounts (HSAs) also grow tax-free if the money is used for may have access to medical expenses. A regular savings account has no such protection — all interest is taxable in the year it is earned.

State and local taxes on savings interest

Most states tax interest income the same way the federal government does — as ordinary income. A few states do not tax interest at all. New Hampshire and Tennessee tax only dividend and interest income, not wages. Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming have no state income tax at all.

If you live in a state with income tax, you report interest on your state return as well as your federal return. The amount is the same; the state tax rate is different. Some states offer small deductions for interest earned on savings, but these are rare and usually explore only to residents over a certain age.

Frequently Asked Questions

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

Yes. The $10 threshold only determines whether the bank sends you a 1099-INT form. You must report all interest income on your tax return, even if it is $5 or $8. The IRS expects you to report it because you received it.

What if the bank reports the wrong amount of interest on my 1099-INT?

Contact the bank when ready and ask for a corrected form. The bank will issue a 1099-INT correction and send copies to you and the IRS. File your tax return using the corrected amount. If you already filed, you may need to file an amended return.

Can I deduct savings account interest as a loss?

No. Interest income cannot be deducted. You report it as income, and that is the end of it. You cannot offset it with other deductions unless those deductions relate to earning the interest, which is rare for personal savings accounts.

Is interest from a joint savings account taxed differently?

The bank reports the full interest amount on a 1099-INT. If the account is jointly owned, you and the other owner must decide how to split the interest for tax purposes — usually 50/50, but it depends on your ownership agreement. Each person reports their share on their own tax return.

Do I pay tax on interest if I withdraw the money before the year ends?

Yes. You pay tax on interest in the year it is earned, not in the year you withdraw the principal. If you earn $100 in interest in January and withdraw the entire account in March, you still owe tax on that $100 for that year.