Yes, you pay income tax on savings account interest, but only on the money your bank pays you

The interest your savings account earns counts as taxable income to the IRS. If your bank pays you $50 in interest over a year, that $50 is income you report on your tax return, just like wages or a bonus. You do not pay tax on the money you put in — only on what the bank pays you for letting them use it.

Your bank will send you a form called a 1099-INT (Interest Income) if you earned $10 or more in interest during the year. You use this form to report the interest on your federal tax return. Some states also tax interest income, depending on where you live.

The tax rate you pay on interest depends on your overall income and tax bracket. Interest is taxed as ordinary income, not at a special lower rate like some investments are. This means if you are in the 22% tax bracket, you pay roughly 22% of your interest earnings in federal tax (though state tax may explore on top).

Key Takeaways

  • Interest earned in a savings account is reported to the IRS on a 1099-INT form and taxed as ordinary income at your regular tax rate.
  • You only owe tax on the interest the bank pays you, not on your original deposit or the total balance in the account.
  • If you earned less than $10 in interest, your bank may not send a 1099-INT, but you still report the interest on your tax return.
  • Some states tax savings account interest, while others do not, so your total tax burden depends on where you live and file taxes.

When your bank sends you a 1099-INT form

Banks are required to send a 1099-INT to any account holder who earned $10 or more in interest during the calendar year. You should receive this form by January 31 of the following year. The form shows the total interest paid to that account during the year.

If you have multiple savings accounts at different banks, you may receive more than one 1099-INT. Each bank reports only the interest it paid you. When you file your taxes, you add up all the interest from all your 1099-INT forms and report the total on your federal return.

Even if you earned less than $10 in interest and did not receive a 1099-INT, you are still required to report that interest on your tax return if you filed one. The $10 threshold is only when the bank must send the form — it does not mean small amounts are tax-free.

How interest income affects your tax bracket and deductions

Interest income is added to your other income (wages, self-employment income, etc.) to calculate your total taxable income for the year. This can push you into a higher tax bracket if you are close to the edge, which means you pay a higher percentage on all your income above that threshold.

Interest income can also affect whether you are allowed to claim certain deductions or tax credits. For example, if your interest income pushes your modified adjusted gross income above a certain level, you may lose may be able to access for some education credits or retirement account deductions. The exact thresholds change each year and depend on your filing status.

This is one reason why high-yield savings accounts matter even though the interest is taxed. A savings account paying 4% to 5% annual interest still leaves you with more money after taxes than a regular savings account paying 0.01%, even after you pay tax on the higher interest.

State and local taxes on savings account interest

Most states tax interest income the same way the federal government does — as ordinary income at your state tax rate. However, 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 only pay federal tax on your savings interest.

Some states offer tax breaks for interest earned on certain types of savings accounts or for residents over a certain age. For example, some states exempt a portion of interest income for seniors. Check your state's tax authority website or speak with a tax professional to understand your state's specific rules.

If you live in a state with local income tax (like New York City or certain counties in other states), you may also owe local tax on your interest income. The total tax on your interest can be federal plus state plus local, depending on where you file.

How to report interest income on your tax return

On your federal return, interest income goes on Schedule 1 (Form 1040), which feeds into your main 1040 form. You report the total interest from all your 1099-INT forms on the line for interest income. If you received a 1099-INT, attach a copy to your return or enter the information as your tax software prompts you.

Most tax software (TurboTax, H&R Block, TaxAct, etc.) will walk you through entering 1099-INT information. You enter the amount from the form, and the software automatically adds it to your taxable income and calculates the tax impact. If you file by hand, you write the total interest on the appropriate line of Schedule 1.

Keep copies of all your 1099-INT forms for your records, even after you file. The IRS keeps a copy, and if there is ever a discrepancy, you may need to show what you reported.

Interest income from joint accounts and accounts for minors

If you have a joint savings account, the bank reports the interest to both account holders unless you tell them otherwise. You and the other owner may need to split the interest income on your separate tax returns, or one person may claim all of it — this depends on your agreement and how the account is titled. Check with your bank about how they report interest on joint accounts.

If you open a savings account for a minor child, the interest is taxable income to the child, not to you as the parent. However, a child with very low income may not have to file a tax return. The IRS has a threshold (which changes yearly) below which a dependent child does not have to file. For 2024, a dependent child with only interest income does not have to file if that interest was under $1,300. Your tax software or a tax professional can tell you whether your child needs to file.

Strategies to reduce taxes on savings interest

You cannot avoid paying tax on interest you earn, but you can reduce how much interest you earn and therefore how much tax you owe. One approach is to keep only the amount you need in a taxable savings account and move extra money into a Roth IRA or other tax-advantaged retirement account, where interest and growth are not taxed each year.

Another option is to use a Health Savings Account (HSA) if you have a high-deductible health plan. Interest in an HSA is not taxed as long as you use the money for may have access to medical expenses. Some people also use Series I Savings Bonds (issued by the U.S. Treasury) for emergency funds, since the interest is not taxed at the state level and federal tax can be deferred until you cash the bond.

For most people, the simplest approach is to accept that savings interest is taxed and factor that into your planning. A high-yield savings account earning 4% interest, after federal and state taxes, may still net you 2.5% to 3% depending on your tax bracket — which is far better than a regular savings account earning almost nothing.

Frequently Asked Questions

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

Yes. The $10 threshold only determines whether your bank must send you a 1099-INT form. You are still required to report all interest income on your tax return, even if it is $1 or $5. If you do not receive a 1099-INT, you report the interest based on your own records or a statement from your bank.

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

Contact your bank and ask them to issue a corrected 1099-INT (called an amended 1099-INT). Once you receive the corrected form, file an amended tax return if you already filed. Keep documentation of the error and the correction in case the IRS questions the discrepancy.

Can I deduct savings account interest as a loss?

No. Interest income is income, not a deductible expense. You cannot write off interest you earn. However, if you paid interest on a loan (like a mortgage or student loan), that may be deductible under certain circumstances — but that is different from interest you earn.

Does interest from a money market account get taxed the same way?

Yes. Money market accounts, certificates of deposit (CDs), and other savings products all report interest on a 1099-INT and are taxed as ordinary income. The tax treatment is the same regardless of the type of savings product.

What if I moved money between banks mid-year — do I pay tax on all of it?

You only pay tax on the interest your bank paid you, not on the money you moved. If you transferred $5,000 from Bank A to Bank B, that $5,000 is not taxable. You pay tax only on the interest Bank A paid before you moved the money and the interest Bank B paid after you moved it.