Yes, you pay federal income tax on interest your savings account earns, but the amount depends on how much interest you made and your total income for the year

The IRS treats savings account interest as ordinary income. That means if your account earned $50 in interest over the year, that $50 is taxable income just like wages from a job. Your bank will report this to the IRS on a form called a 1099-INT, and you report it on your tax return. You owe federal tax on it unless your total income falls below the threshold where you have to file at all.

State and local taxes work the same way — if your state has an income tax, you owe tax on the interest there too. A few states don't tax interest income at all, but most do. The tax rate you pay depends on your overall income bracket, not on the interest amount itself.

The practical impact is small for most people. Current savings account rates are around 4 to 5 percent annually, so a $10,000 account earns roughly $400 to $500 per year in interest. At a 22 percent federal tax rate, that's $88 to $110 in tax. But if you're in a lower bracket or have little other income, you might owe nothing.

Key Takeaways

  • Your bank reports savings interest to the IRS on a 1099-INT form, and you must report it as income on your tax return.
  • The tax you owe depends on your total income for the year and which tax bracket you fall into, not on the interest amount alone.
  • If your total income is below the filing threshold for your age and filing status, you may not owe tax even if you earned interest.
  • State income tax applies to savings interest in most states, though a handful of states do not tax interest income.
  • High-yield savings accounts earn more interest than traditional accounts, which means more taxable income and potentially more tax owed.

When the IRS requires your bank to report interest income

Your bank sends a 1099-INT to the IRS and to you if your account earned $10 or more in interest during the calendar year. This threshold is low by design — the IRS wants to track even small amounts. If you earned $8 in interest, your bank won't send a 1099-INT, but you still owe tax on that $8 if you're required to file a return.

You should receive the 1099-INT by January 31 of the following year. It shows the account number, the bank's name, and the total interest earned. If you have multiple savings accounts at different banks, you'll get a separate 1099-INT from each one. If you have multiple accounts at the same bank, they may combine them into one form or send separate ones — this varies by bank.

Keep the 1099-INT with your tax records. When you file your return, you report the interest amount on Schedule 1 (Form 1040), which feeds into your total income. The IRS matches what you report to what the bank reported, so mismatches trigger a notice.

How your tax bracket determines what you actually owe

The tax rate on your interest depends on your marginal tax bracket — the rate that applies to your last dollar of income. If you earned $50,000 in wages and $500 in interest, that $500 is taxed at whatever bracket your $50,500 total income puts you in, not at a special rate for interest.

For 2024, the federal brackets are: 10 percent, 12 percent, 22 percent, 24 percent, 32 percent, 35 percent, and 37 percent. Your bracket depends on your filing status (single, married filing jointly, head of household, etc.) and your total income. A single person with $40,000 in income falls in the 22 percent bracket, so interest is taxed at 22 percent. The same person with $20,000 in income falls in the 12 percent bracket, so interest is taxed at 12 percent.

This is why the actual tax on savings interest is often small. A $10,000 account earning 4.5 percent interest generates $450 per year. At 22 percent, that's $99 in federal tax. At 12 percent, it's $54. The interest itself is modest, and the tax on it is a fraction of that.

Whether you have to file a return at all

You only have to file a federal tax return if your income exceeds a certain threshold. For 2024, a single person under 65 must file if their income is $14,600 or more. A married couple filing jointly must file if their combined income is $29,200 or more. These thresholds change yearly and depend on your age and filing status.

If you earned $500 in savings interest and had no other income, you would not be required to file a return (assuming you're under 65 and single). You would owe no federal tax. However, if you had wages or other income that pushed your total above the threshold, you would file and report the interest.

Even if you're not required to file, you may want to file anyway if taxes were withheld from your pay or if you're may have access to to a refundable credit like the Earned Income Tax Credit. The IRS won't come after you for interest income alone if you're below the threshold, but filing can get you money back.

State and local taxes on savings interest

Most states tax interest income the same way the federal government does — as ordinary income at your state tax rate. If your state has a 5 percent income tax and you earned $500 in interest, you owe $25 in state tax on top of federal tax.

A few states do not tax interest income at all. These include Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming. If you live in one of these states, you owe no state tax on savings interest, though you still owe federal tax. Some states tax interest but exempt it below a certain amount, or tax it differently depending on your age — check your state's revenue department website for the exact rules.

Local taxes (city or county) rarely explore to savings interest, but a handful of cities do tax income. If you live in New York City or a few other municipalities with local income tax, that tax applies to interest too. Your state revenue department can tell you whether your locality taxes interest.

How to report interest on your tax return

When you file your federal return, you report interest income on Schedule 1 (Form 1040), line 8. If you have multiple 1099-INTs, add them together and enter the total. The amount flows into your total income on the main Form 1040, which determines your tax bracket and any credits you might be may have access to to.

If you use tax software, it usually walks you through entering the 1099-INT information. If you file by hand or with a tax professional, bring all your 1099-INTs with you. The key is making sure the amount you report matches what the bank reported to the IRS — if it doesn't, the IRS will notice and send you a notice.

For state taxes, you typically report the same interest amount on your state return. Some states have their own forms or schedules, but the process is similar. Your state tax software or a tax professional can guide you through the state-specific steps.

Strategies to reduce taxable interest income

You cannot avoid tax on interest you've already earned, but you can structure your savings to minimize future interest income if tax is a concern. One option is to keep some money in a regular savings account earning little to no interest, rather than putting everything in a high-yield account. This reduces taxable interest but also reduces your earnings.

Another option is to use a Roth IRA or 401(k) for savings if you're may be able to access. Interest earned inside these accounts is not taxed annually — you only pay tax when you withdraw money in retirement, and Roth accounts may not be taxed at all. These accounts have contribution limits and withdrawal rules, so they're not a fit for all savings, but they're worth considering for money you plan to keep invested long-term.

For very large savings balances, some people use tax-exempt bonds or other investments that generate tax-free income. These typically pay lower interest rates than savings accounts, so the trade-off is lower earnings for lower taxes. A tax professional can help you weigh whether this makes sense for your situation.

What happens if you don't report interest income

If you earned $10 or more in interest, your bank reported it to the IRS on a 1099-INT. The IRS has a copy of that form. If you don't report the interest on your return, the IRS will eventually notice the mismatch and send you a notice asking you to explain or pay the tax owed plus penalties and interest.

The penalty for not reporting income is typically 20 percent of the unpaid tax, plus interest that accrues daily. If you owed $100 in tax on $500 in interest and didn't report it, you could end up owing $120 or more by the time the IRS catches up. It's not worth the risk — reporting takes minutes and costs nothing.

If you made an honest mistake, you can file an amended return (Form 1040-X) to correct it. The IRS is usually reasonable about mistakes if you fix them yourself before they contact you. But if they contact you first, penalties are harder to avoid.

Frequently Asked Questions

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

Your bank won't send a 1099-INT if you earned less than $10, but you still owe tax on it if you're required to file a return. Report the interest on Schedule 1 even if you don't have a 1099-INT. If you're not required to file (your income is below the threshold), you owe no tax on the interest.

What if I have savings accounts at multiple banks?

Each bank sends a separate 1099-INT if you earned $10 or more at that bank. Add all the interest amounts together and report the total on your tax return. The IRS receives all the 1099-INTs and expects your return to match the sum.

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

No. You report the gross interest your bank paid you, not the net amount after fees. Savings account fees are not deductible on your personal return. If the fees are very high, switching banks may be a better option than trying to deduct them.

Is interest from a joint savings account taxed differently?

The interest is taxed to whoever owns the account or, if both people own it jointly, it's split based on each person's contribution. The bank reports the interest on a 1099-INT in the name of the account owner. If the account is jointly owned, you may need to split the interest between you and file accordingly, or the bank may report it all to one person — check with your bank on how they handle joint accounts.

Do I owe tax on interest if I'm a dependent on someone else's return?

Yes, you owe tax on interest you earned, even if you're claimed as a dependent. However, you may not be required to file your own return if your interest income is below the threshold for dependents, which is lower than for independent filers. Check the IRS rules for dependents in the year you're filing.