You pay income tax on the interest your savings account earns, but not on the money you deposit
The money you put into a savings account is yours — you do not pay tax on it when you deposit it or when you withdraw it. But the interest the bank pays you for letting them use that money is taxable income. The IRS treats it the same way it treats wages or freelance income. Your bank reports this interest to both you and the IRS on a form called a 1099-INT, and you report it on your tax return.
The amount of tax you owe depends on your overall income and tax bracket, not just on the savings interest alone. Someone in the 22% tax bracket pays more tax on the same interest than someone in the 10% bracket. The interest itself is small enough that many people owe no tax at all — but you still have to report it if your bank sent you a 1099-INT.
Key Takeaways
- Interest earned in a savings account counts as taxable income and must be reported on your federal tax return.
- Your bank sends you a 1099-INT form by January 31 each year showing how much interest you earned, and also sends a copy to the IRS.
- You owe tax on the interest only if your total income pushes you into a tax bracket where you owe federal income tax — not everyone does.
- High-yield savings accounts earn more interest than traditional savings accounts, which means more tax owed, but the after-tax return is usually still higher.
When the IRS requires you to report savings interest
You must report interest on your tax return if your bank sent you a 1099-INT form. Banks are required to send this form if you earned $10 or more in interest during the year. If you earned less than $10, your bank may not send a form, but you should still report the interest if you received any.
The 1099-INT arrives by January 31 and shows the interest earned in the previous calendar year. It has your name, Social Security number, and the bank's information. The IRS receives a copy at the same time, so if you do not report the interest, the IRS will notice the mismatch.
How much tax you actually owe on savings interest
The tax rate on savings interest is your marginal tax rate — the percentage you pay on your last dollar of income. For 2024, federal income tax brackets range from 10% to 37%, depending on how much total income you have. If you earn $23,200 to $94,300 as a single filer, you are in the 22% bracket, meaning you owe 22 cents in federal tax for every dollar of interest.
But you do not owe tax on the interest unless your total income is high enough to require you to file a return. For 2024, a single person under 65 with no other income does not have to file a federal return unless they earned more than $14,600. If your only income is $500 in savings interest, you would not owe federal tax — though you might still want to file if you paid taxes through an employer and are due a refund.
State and local income tax also applies to savings interest in most states. The rate varies by state, from 0% in states like Texas and Florida to over 10% in states like California and New York. Some states tax interest differently than federal income, so check your state's rules.
The difference between traditional and high-yield savings accounts for taxes
A traditional savings account at a large bank might earn 0.01% annual interest. A high-yield savings account might earn 4% to 5%. On a $10,000 balance, that is the difference between $1 in interest per year and $400 to $500. You owe tax on both amounts, but the high-yield account generates much more tax.
If you are in the 22% federal bracket and a 5% state bracket, you owe 27 cents in total tax for every dollar of interest. On $400 in interest, that is about $108 in tax. But you still keep $292 after tax, which is far more than the $0.73 you would keep from a traditional savings account earning $1. The higher interest rate means more tax, but also more money in your pocket after tax.
Tax-advantaged accounts that avoid or defer this tax
Certain accounts let you earn interest without paying tax on it when ready. A Roth IRA or Roth 401(k) lets you earn interest tax-free as long as you follow the withdrawal rules — you cannot touch the money before age 59½ without penalties, with some exceptions. A traditional IRA or 401(k) lets you defer the tax until you withdraw the money in retirement, when you may be in a lower tax bracket.
A 529 college savings plan lets you earn interest tax-free if you use the money for education expenses. A Health Savings Account (HSA) works the same way for medical expenses. These accounts have contribution limits and rules about how you can use the money, but if your situation fits, they can save you significant tax on savings interest.
Regular savings accounts have no such protection. The interest is taxed every year, regardless of whether you withdraw the money or leave it to compound.
How to report savings interest on your tax return
When you file your federal return, you report the interest on Schedule B (Interest and Ordinary Dividends) if you have more than $1,500 in interest and dividends combined. If you have less than that, you can report the interest directly on your 1040 form. You will need the 1099-INT your bank sent you, which shows the exact amount.
If you have multiple savings accounts at different banks, each bank sends its own 1099-INT. You add up all the interest from all the forms and report the total. If one bank made a mistake on the form, contact them to request a corrected form before you file.
State tax returns work similarly — you report the same interest income on your state return, usually on a schedule or line item for interest and dividends. Some states have different rules about what counts as taxable interest, so check your state's instructions.
What happens if you do not report savings interest
The IRS receives a copy of every 1099-INT your bank sends. If you do not report the interest on your return, the IRS will eventually notice. They may send you a notice asking you to file an amended return and pay the tax owed, plus interest on the unpaid amount. If the IRS determines you intentionally did not report the income, you could face penalties on top of the tax and interest.
The penalty for not filing a required return is usually 5% of the unpaid tax per month, up to 25%. The penalty for underpaying tax is 0.5% per month. These add up quickly, so reporting the interest when you file is far cheaper than dealing with the IRS later.
Frequently Asked Questions
Do I have to report savings interest if I earned less than $10?
Your bank does not have to send a 1099-INT if you earned less than $10, but you should still report any interest you earned on your tax return. The IRS expects you to report all income, regardless of whether you received a form.
Can I deduct savings account fees from the interest I report?
No. You report the full interest amount on your tax return. You cannot subtract fees or other expenses related to the account. However, if you have investment-related expenses, you may be able to deduct them under other rules — consult a tax professional about your specific situation.
What if I moved money between savings accounts during the year?
Moving money between your own accounts does not create taxable income. Only the interest the bank paid you is taxable. If you moved $50,000 from one account to another, that is not income. The interest earned on that $50,000 is what you report.
Is savings interest taxed differently if I am retired?
The interest itself is taxed the same way regardless of your age or employment status. However, if you are over 65, you get an extra standard deduction on your federal return, which might mean you owe no tax even though you have interest income. Check the IRS rules for your filing status and age.
Do I owe tax on interest if the account is in my child's name?
Yes. The child owes tax on the interest, and the 1099-INT is issued in the child's name and Social Security number. The child must report it on their own return, or the parent can report it on theirs under the "kiddie tax" rules if the child is under 18. Consult a tax professional for your specific situation.