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 tax on. What is taxable is the interest the bank pays you for keeping your money there. The IRS treats savings account interest as ordinary income, the same as wages or salary.
How much tax you owe depends on how much interest you earned and your overall income for the year. If you earned less than a certain threshold, you may owe no federal tax at all. Your bank will report the interest to the IRS on a form called a 1099-INT, and you report it on your tax return.
Some states also tax savings interest, and some do not. A few states exempt interest income entirely, while others tax it at the same rate as federal income tax. Your state's tax rules depend on where you live and file taxes, not where your bank is located.
Key Takeaways
- Interest earned on a savings account is taxable income at the federal level and must be reported on your tax return.
- Your bank sends you a 1099-INT form by January 31 each year showing how much interest you earned, and you use this to file your taxes.
- You owe no federal tax on interest if your total income falls below the standard deduction for your filing status, though you may still need to file.
- State tax on savings interest varies: some states do not tax it, while others tax it as ordinary income.
- Interest rates on savings accounts are currently low enough that most people earn less than $10 in annual interest unless they have a large balance.
How the IRS knows about your interest
Banks are required to report interest payments to the IRS if you earn $10 or more in a calendar year. They do this using Form 1099-INT, which your bank mails to you by January 31 of the following year. The form shows your name, the bank's name, your account number, and the total interest paid.
The IRS receives a copy of the same form, so they know how much interest you earned. If you do not report this interest on your tax return and the IRS has a record of it, you may face penalties or an audit. Even if you earn less than $10 and your bank does not send a 1099-INT, you are still required to report the interest if you owe any tax on 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 your accounts when you file your return. Some tax software and tax preparers can import these forms directly, which reduces the chance of errors.
When you owe federal tax on interest
Whether you owe federal tax depends on your total income and your filing status. The IRS sets a threshold called the standard deduction, which changes each year. If your total income is below this threshold, you owe no federal income tax, even if you earned interest.
For 2024, the standard deduction is $14,600 for a single filer and $29,200 for a married couple filing jointly. These numbers increase slightly each year. If you earned $500 in interest and your only other income was $14,000 in wages, your total income would be $14,500, which is above the standard deduction, so you would owe tax on the interest portion.
The tax rate on interest depends on your overall tax bracket. Interest is taxed as ordinary income, not at a special rate. If you are in the 12% tax bracket, you pay 12% on the interest. If you are in the 22% bracket, you pay 22%. The more income you have, the higher your bracket and the more tax you owe on the interest.
State and local taxes on savings interest
Nine states do not tax income at all: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, Wyoming, and New Hampshire (which taxes only interest and dividends, but is phasing this out). If you live in one of these states, you owe no state tax on your savings interest.
Most other states tax interest as ordinary income at their state income tax rate. Some states have a lower rate for interest and dividends than for wages. A few states offer small exemptions — for example, some allow you to exclude the first $100 or $200 of interest income per year. Your state's tax department website lists the rules for your state.
If you live in one state but work or have income in another, you may owe tax to both states. This is rare for savings interest, but it can happen. A tax preparer in your state can tell you whether you owe state tax on your interest.
How to report interest on your tax return
When you file your federal tax return, you report interest income on Schedule B (Interest and Ordinary Dividends) if you earned more than $1,500 in interest and dividends combined. If you earned $1,500 or less, you can report it directly on Form 1040 without using Schedule B.
You enter the total interest from all your 1099-INT forms on one line. If you use tax software, it usually walks you through entering this information and places it in the right spot on your return. If you file by hand or with a tax preparer, bring all your 1099-INT forms with you.
You do not need to attach the 1099-INT forms to your return when you mail it, but you should keep copies for your records. If you file electronically, the software submits your return without the forms attached, but the IRS has its own copy from your bank.
Why current interest rates matter
The amount of tax you owe on savings interest depends entirely on how much interest you earned. In recent years, high-yield savings accounts have paid between 4% and 5% annually, while traditional savings accounts at large banks pay 0.01% to 0.05%. The difference is enormous.
If you have $10,000 in a traditional savings account earning 0.01%, you earn $1 per year in interest — below the $10 reporting threshold, so no 1099-INT. If you have $10,000 in a high-yield account earning 4.5%, you earn $450 per year, which you must report and pay tax on. At a 22% tax rate, that is $99 in federal tax.
This is one reason people move money to high-yield savings accounts: the interest rate is high enough that the after-tax earnings still exceed what a traditional account pays. But it also means you need to track the interest and report it correctly at tax time.
What happens if you do not report interest income
If the IRS discovers that you did not report interest income that appears on a 1099-INT they received from your bank, they may send you a notice. The penalty for underreporting income is usually 20% of the unpaid tax, plus interest on the unpaid amount going back to the original due date.
If the underreporting was unintentional and you correct it quickly, the IRS may waive the penalty. If it was intentional or part of a pattern, penalties are steeper. The safest approach is to report all interest, even small amounts, on your tax return.
If you are unsure whether you owe tax on your interest, a tax preparer or the IRS Free File program (for people earning under $79,000) can help you figure it out. Many public libraries also offer free tax help during tax season.
Frequently Asked Questions
Do I have to file a tax return if I only earned interest and no other income?
Only if your interest income exceeds the standard deduction for your filing status. For 2024, that is $14,600 for a single person. If you earned $500 in interest and had no other income, you would not owe federal tax and would not need to file. However, if you had taxes withheld from other sources, you might file to get a refund.
What if I earned less than $10 in interest?
Your bank does not have to send you a 1099-INT if you earned less than $10. However, you are still required to report the interest on your tax return if you owe any tax on it. Most tax software will let you enter interest amounts under $10 manually.
Can I deduct any expenses related to my savings account?
No. Interest income is reported as-is with no deductions. You cannot deduct account fees, even if the bank charged you a monthly maintenance fee. Account fees reduce the net interest you earn, but they do not reduce your taxable interest income.
Do I pay taxes on money I transfer between my own accounts?
No. Transfers between your own accounts are not taxable events. Only the interest the bank pays you is taxable. Moving $5,000 from checking to savings creates no tax liability.
What if my savings account is in a different state than where I live?
You report interest to the state where you live and file taxes, not the state where the bank is located. If you live in California but have a savings account at a bank in Nevada, you still owe California state tax on the interest (if California taxes it, which it does).