Yes, the interest your savings account earns is taxed as ordinary income

The money you deposit into a savings account is yours and not taxed again. But the interest the bank pays you on that balance is taxable income. The IRS treats it the same way it treats wages or freelance earnings — you owe federal income tax on it, and depending on where you live, you may owe state and local income tax too.

This applies to every type of regular savings account: high-yield savings accounts, money market accounts, certificates of deposit (CDs), and traditional savings accounts. The interest rate does not matter. A savings account earning 0.01% per year and one earning 4.5% per year are both taxed the same way — as ordinary income at your marginal tax rate.

The bank reports what you earned to the IRS on a Form 1099-INT (Interest Income) if your interest exceeds $10 in a calendar year. You receive a copy, and you report that same amount on your tax return. If you have multiple accounts, the bank adds up all the interest from all accounts at that institution and reports the total on one form.

Key Takeaways

  • Interest earned on savings accounts is taxed as ordinary income at your federal tax rate, which ranges from 10% to 37% depending on your total income.
  • Banks report interest over $10 per year on Form 1099-INT, which you receive by January 31 and must report on your tax return.
  • State and local income taxes also explore to savings account interest in most states, adding another 1% to 13% depending on where you live.
  • You owe tax on interest even if the bank has not yet paid it to you, so you may owe taxes on money you have not received.
  • Tax-advantaged accounts like Roth IRAs and 529 plans let interest grow without annual tax, though they have contribution limits and withdrawal rules.

How your tax rate on savings interest works

The tax you pay on savings interest depends on your marginal tax bracket — the highest tax rate that applies to your income. If you earn $50,000 per year and fall into the 22% federal tax bracket, interest on your savings is taxed at 22%, not at a lower rate. The IRS does not separate investment income from wages for tax purposes.

This means a high-income earner in the 37% bracket pays 37 cents in federal tax on every dollar of savings interest, while someone in the 10% bracket pays 10 cents. A $1,000 interest payment costs $370 in federal tax for the first person and $100 for the second.

State income tax stacks on top of federal tax. New York, California, and New Jersey tax savings interest at rates between 6% and 13%. Nine states — Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, Wyoming, and New Hampshire — have no state income tax at all. The remaining states fall somewhere in between. Your total tax on savings interest is federal rate plus state rate (if applicable).

When you owe tax on interest you have not received yet

Banks typically pay interest monthly or quarterly, but you owe tax on it in the year it is earned, not the year you receive it. If a CD matures on December 31 and the bank credits the interest to your account that day, you owe tax on that interest in that tax year, even though you may not touch the money until January.

This matters most with CDs and promotional savings accounts that pay interest in a lump sum at maturity. You should ask the bank when interest will be credited so you can plan for the tax bill. Some banks let you choose to receive interest monthly instead of at maturity, which spreads the tax across two years.

The difference between regular accounts and tax-advantaged accounts

Regular savings accounts have no tax shelter. Every dollar of interest is taxable in the year you earn it. But certain retirement and education accounts let interest and other earnings grow without triggering annual tax bills.

A Roth IRA lets you contribute up to $7,000 per year (or $8,000 if you are 50 or older), and all interest and investment gains grow tax-free forever. You never pay tax on the earnings, even when you withdraw them in retirement — as long as the account has been open at least five years and you are at least 59½. The tradeoff is that you cannot withdraw the earnings before retirement without a penalty, and there are income limits on who can contribute.

A 529 education savings plan works similarly: interest and investment gains grow tax-free as long as the money is used for may have access to education expenses like tuition, room and board, or student loan repayment. If you withdraw money for non-education purposes, you pay tax on the earnings portion plus a 10% penalty. Contribution limits are much higher — often $235,000 or more per beneficiary — but the money is no longer yours once it is in the account.

A traditional IRA defers tax on earnings until you withdraw the money in retirement, at which point withdrawals are taxed as ordinary income. This is different from a Roth: you get a tax deduction now, but you pay tax later.

How to report savings interest on your tax return

If your interest is $10 or less for the year, the bank does not send you a Form 1099-INT, but you still owe tax on it. You report it on Schedule B (Interest and Ordinary Dividends) if you file a full return, or on Form 1040 directly if you use the short form.

If your interest exceeds $10, the bank sends you Form 1099-INT by January 31. The form shows the total interest earned at that bank across all your accounts there. You report this amount on your tax return in the same tax year. If you have accounts at multiple banks, each bank sends its own 1099-INT, and you add them all together on your return.

The IRS receives a copy of every 1099-INT issued, so they know how much interest you earned. If you do not report it on your return, the IRS will notice the mismatch and may send you a notice or bill you for the unpaid tax plus penalties and interest.

Strategies to reduce tax on savings interest

The most straightforward way to reduce tax on savings interest is to use tax-advantaged accounts first. Max out a Roth IRA ($7,000 per year for most people) before putting extra money into a regular savings account. If you have children, a 529 plan lets you save for education expenses tax-free. If you are self-employed, a Solo 401(k) or SEP IRA lets you shelter much larger amounts.

If you have already maxed out these accounts and still have money to save, a regular savings account is still worth using — the interest is taxed, but you are earning more than you would in a non-interest-bearing checking account. The tax is a cost of earning the interest, not a reason to avoid saving.

Some people keep money in a regular savings account specifically because they need access to it. The tax on interest is a small price for liquidity. If you do not need the money for several years, a CD or money market account might earn more interest, but you will still owe tax on it at the same rate.

What happens if you do not report savings interest

If your interest is under $10 and you do not report it, the IRS is unlikely to pursue it — the administrative cost exceeds the tax owed. But if your interest is $10 or more and you do not report it on your return, the IRS will match the 1099-INT the bank sent them against your return. If it is missing, they will send you a notice asking you to file an amended return or pay the tax owed.

If you ignore the notice, the IRS can assess the tax, plus penalties (usually 20% of the unpaid tax) and interest (currently around 8% per year). The penalty and interest compound, so a small unpaid tax can grow quickly. It is always cheaper to report the interest when you file.

Frequently Asked Questions

Do I owe tax on interest if I have not withdrawn the money yet?

Yes. You owe tax on interest in the year it is earned, regardless of whether you have withdrawn it or left it in the account. If a savings account earns $500 in interest in 2024, you owe tax on that $500 in 2024, even if you do not touch the money until 2025.

What if I have interest under $10 — do I still have to report it?

Technically yes, but the bank does not send you a 1099-INT if interest is $10 or less, and the IRS is unlikely to pursue such small amounts. That said, the law requires you to report all interest income. If you want to be fully compliant, report it on Schedule B or Form 1040.

Can I avoid taxes by moving money between accounts?

No. Moving money from one savings account to another does not create a taxable event — you are not earning interest by moving it. But the interest you earn in each account is still taxable, regardless of how many times you move the principal.

Is interest from a CD taxed differently than interest from a savings account?

No. Both are taxed as ordinary income at your marginal tax rate. The only difference is timing: CD interest is often paid in a lump sum at maturity, while savings account interest is usually paid monthly or quarterly. You owe tax in the year the interest is credited, not the year you receive it.

What if I earned interest but the bank made a mistake on the 1099-INT?

Contact the bank and ask them to issue a corrected Form 1099-INT (marked as a correction). They will send the corrected form to you and the IRS. You may also need to file an amended tax return if you already filed. Do this as soon as you notice the error — the longer you wait, the more complicated it becomes.