You owe federal income tax on interest your savings account earns, and possibly state income tax too

Any interest your savings account generates counts as taxable income to the IRS. If your account earned $10 in interest over a year, that $10 is income you report. The bank does not withhold taxes automatically — you pay them when you file your tax return, or through quarterly estimated payments if you owe a large amount.

The tax rate depends on your total income and tax bracket, not on the interest amount itself. Someone in the 22% federal tax bracket pays roughly 22 cents in federal tax per dollar of interest. Someone in the 12% bracket pays roughly 12 cents. State income tax, where your state charges it, stacks on top of that.

Most people with savings accounts owe very little in taxes on interest because savings rates are low and interest earned is small. But you still have to report it, and the bank will report it to the IRS too.

Key Takeaways

  • Banks report interest earnings to the IRS on a Form 1099-INT if you earned $10 or more in a calendar year, and they send you a copy.
  • You report this interest on your federal tax return as ordinary income, taxed at your marginal tax rate.
  • Most states with income tax also tax savings interest the same way, though a few states exempt it entirely.
  • You do not owe taxes on the principal (the money you deposited), only on the interest the bank paid you.
  • If you expect to owe more than $1,000 in federal income tax for the year, you may need to make quarterly estimated tax payments rather than waiting until April.

How the IRS finds out about your interest

Banks are required to report interest payments to the IRS and to you. If your account earned $10 or more in interest during a calendar year, the bank sends you a Form 1099-INT by January 31 of the following year. The bank also files a copy with the IRS under your Social Security number.

This means the IRS already knows about your interest before you file your return. If you do not report it and the IRS notices the mismatch, they will contact you. It is simpler and safer to report it yourself.

If you earned less than $10 in interest, the bank does not have to send you a 1099-INT, but you still owe tax on that interest if you file a return. Many people with very small interest amounts do not file returns at all because their income falls below the filing threshold, but that is a separate question from whether the interest itself is taxable.

What tax rate applies to your interest

Savings interest is taxed as ordinary income, meaning it is added to your wages, self-employment income, or other earnings and taxed at your marginal tax rate — the rate that applies to your highest dollars of income.

Federal tax brackets change each year. For 2024, if you are single and your total income (including interest) falls between roughly $11,000 and $44,700, you are in the 12% bracket. Between $44,700 and $95,375, you are in the 22% bracket. The brackets are wider for married couples filing jointly. This means $100 in interest might cost you $12 in federal tax if you are in the 12% bracket, or $22 if you are in the 22% bracket.

State income tax rates vary widely. New York taxes interest at rates up to 10.9%. California goes up to 13.3%. Texas, Florida, and several other states have no income tax at all, so residents pay no state tax on interest. A few states like Illinois exempt interest income entirely, though this is rare.

When you report interest on your tax return

You report interest income on Schedule B (Interest and Ordinary Dividends) if you have more than $1,500 in total interest and dividends for the year. If you have less than $1,500, you can report it directly on your Form 1040 (the main federal return form) without filing Schedule B.

You list each account separately on Schedule B if you have multiple savings accounts, though many tax software programs combine them automatically. The total goes on your Form 1040 as part of your total income, and your tax is calculated from there.

If you file electronically using tax software, the software usually walks you through this step. If you file by hand or with a tax preparer, bring your 1099-INT forms with you.

The difference between interest and principal

You do not pay tax on the money you put into the account — only on what the bank paid you in interest. If you deposited $5,000 and earned $25 in interest, you owe tax on the $25, not the $5,000. This matters because it means your savings are not being taxed away; only the earnings are.

When you withdraw money from the account, you are withdrawing your own principal plus accumulated interest. Withdrawing principal is not a taxable event. You already paid tax on the interest when you earned it (or will pay it when you file your return), so taking the money out does not create additional tax.

High-yield savings accounts and tax liability

High-yield savings accounts earn more interest than traditional savings accounts — sometimes 4% to 5% annually compared to 0.01% at a traditional bank. This means you owe more in taxes on the interest, but the interest itself is still taxed the same way: as ordinary income at your marginal rate.

If you have $10,000 in a high-yield account earning 4.5%, you earn roughly $450 per year in interest. At a 22% federal tax rate, that costs you about $99 in federal tax. At a 12% rate, about $54. State tax would be additional. This is still usually worth it — you are earning more interest than you would elsewhere — but it is worth knowing the tax cost upfront.

Some people move money between accounts to manage tax liability, but this does not change the tax owed. The interest is taxable in the year it is earned, regardless of which account holds it or when you move it.

Frequently Asked Questions

Do I have to file a tax return if I only earned interest and no wages?

Only if your total income (including interest) exceeds the filing threshold for your age and filing status. For 2024, a single person under 65 must file if their income is $14,600 or more. If you earned $200 in interest and nothing else, you would not have to file. But if you earned $15,000 in interest, you would. Check the IRS website for your specific situation.

What if I earned interest in multiple savings accounts?

You report the total interest from all accounts combined on your tax return. The bank that holds each account sends you a separate 1099-INT, but you add them all together on Schedule B. The tax is calculated on the combined total, not on each account separately.

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, if you paid investment advisory fees or other expenses to manage your savings, you may be able to deduct those separately — but this is complex and rarely applies to basic savings accounts. A tax preparer can tell you whether your situation qualifies.

Do I owe taxes on interest if I do not withdraw it?

Yes. You owe tax on interest in the year it is earned, even if you leave it in the account and do not touch it. The interest is added to your account balance automatically, and that counts as income to the IRS. Withdrawing it or not does not change the tax obligation.

What if the bank made a mistake on my 1099-INT?

Contact the bank and ask them to issue a corrected 1099-INT (marked as a correction). They will file the corrected version with the IRS and send you a copy. You then report the corrected amount on your tax return. Do this as soon as you notice the error — the sooner the correction is filed, the less likely the IRS will flag a mismatch.