Interest from your savings account counts as income the IRS taxes

Yes, you owe federal income tax on the interest your savings account earns. The IRS treats interest the same way it treats wages or salary — as taxable income. Your bank will report this interest to both you and the IRS, and you'll include it when you file your tax return each year.

The amount of tax you actually pay depends on your total income and your tax bracket, not on the interest amount alone. Someone in a higher tax bracket pays a higher percentage on that interest than someone in a lower bracket. This is why two people earning the same interest might owe different amounts in tax.

Most savings accounts earn very little interest, so the tax impact is small. But it's still real, and you should know about it when you're deciding where to keep your money.

Key Takeaways

  • Your bank reports all interest earned to the IRS on a Form 1099-INT, and you must report it on your tax return.
  • The tax rate on interest depends on your overall income and tax bracket, not on the interest amount itself.
  • Interest under $10 may not be reported to the IRS, but you still owe tax on it if you have other income.
  • High-yield savings accounts earn more interest than traditional savings accounts, which means more tax owed, but the interest is still usually small.
  • You can reduce taxable interest by keeping money in accounts that don't earn interest, or by using tax-advantaged accounts like IRAs.

How the IRS finds out about your interest

Your bank tracks every penny of interest it pays you. At the end of the year, usually by January 31, the bank sends you a Form 1099-INT showing the total interest earned in that account during the previous year. The bank also sends a copy to the IRS.

When you file your federal tax return, you report this interest income. The IRS then checks your return against the 1099-INT the bank sent them. If the numbers don't match, the IRS will notice. This is why you can't straightforward ignore small amounts of interest — the IRS already knows about it.

If you have multiple savings accounts, you'll receive a separate 1099-INT from each bank. You add all of them together when you report your interest income on your return.

What tax rate applies to your interest

Interest is taxed as ordinary income, which means it's taxed at the same rate as your wages. If you earn $50,000 in salary and $100 in interest, the IRS treats that $100 the same as any other income.

Your tax rate depends on your tax bracket, which is determined by your total income for the year. The federal tax brackets change each year. For 2024, a single person with income between roughly $11,000 and $44,700 falls into the 12% bracket, meaning 12% of their interest would go to federal tax. Someone with income above $191,950 falls into the 35% bracket, so 35% of their interest goes to federal tax.

This is why the same $100 in interest costs one person $12 in federal tax and another person $35. The interest amount is identical, but the tax owed is different because the people are in different brackets.

State and local taxes on savings interest

Most states also tax interest income. The state tax rate varies widely — some states have no income tax at all, while others tax interest at rates between 3% and 13%. A few states, like New York and California, have both state and city income taxes that explore to interest.

You'll report your interest on your state tax return the same way you report it on your federal return. The 1099-INT your bank sends you is used for both federal and state filing.

If you live in a state with no income tax, like Florida or Texas, you won't owe state tax on your interest, but you'll still owe federal tax.

When interest is too small to report

Banks are not required to send you a 1099-INT if the interest is less than $10 for the year. However, this does not mean you don't owe tax on it. If you earned $8 in interest and have other income, you still technically owe tax on that $8.

In practice, the IRS does not pursue people for tax on interest under $10, especially if they have no other reason to file a return. But if you're already filing a return because you have wages or other income, you should report all interest, even if it's under $10 and you didn't receive a 1099-INT.

How much interest you're likely earning

A traditional savings account at most large banks earns between 0.01% and 0.05% per year. On $10,000, that's $1 to $5 per year. The tax on that is less than $1 for most people.

A high-yield savings account earns more — currently between 4% and 5% per year at many online banks. On $10,000 in a high-yield account, you'd earn $400 to $500 per year. If you're in the 22% federal tax bracket, you'd owe roughly $88 to $110 in federal tax on that interest, plus state tax if your state taxes interest.

The higher the interest rate, the more tax you owe. But even in a high-yield account, the interest itself is usually small enough that the tax impact is manageable.

Ways to reduce the tax on your savings

One option is to keep money in accounts that don't earn interest, like a checking account. You won't earn much, but you also won't owe tax on interest you didn't receive. This only makes sense if you're earning very little interest anyway.

Another option is to use a tax-advantaged retirement account like a traditional IRA or Roth IRA. Interest earned inside these accounts is not taxed each year the way interest in a regular savings account is. In a traditional IRA, you don't pay tax until you withdraw the money. In a Roth IRA, you don't pay tax at all, even when you withdraw. These accounts have rules about when you can withdraw money and how much you can contribute each year, so they're not right for emergency savings, but they're useful for longer-term money.

If you have a very large amount in savings, you might split it between accounts to manage the tax impact, though this is usually only worth doing if you're earning substantial interest.

Frequently Asked Questions

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

It depends on how much interest you earned and your age. For 2024, a single person under 65 with only interest income needs to file if the interest was more than $1,300. If you're 65 or older, the threshold is higher. Check the IRS website or a tax professional for the exact threshold for your situation.

What if I earned interest in a joint account?

The bank reports the full interest amount on a 1099-INT. If the account is truly joint and both people contributed equally, you can split the interest on your tax return, but you'll need to report your share. The bank doesn't split it for you — you do that when you file.

Can I deduct the tax I owe on interest from my taxes?

No. Interest income is taxable, and there's no deduction that reduces it. You report the full amount and pay tax on it based on your bracket. The only way to reduce the tax is to earn less interest or move money to a tax-advantaged account.

Does a child's savings account get taxed differently?

A child's interest is taxed the same way as an adult's — it's reported on a 1099-INT and included as income. However, a child with very low income may not need to file a return. The rules are complex and depend on whether the child has other income and how much interest was earned. A parent or guardian should check the IRS rules or consult a tax professional.

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

Contact your bank and ask them to issue a corrected 1099-INT. They'll send the correction to you and the IRS. You may also need to file an amended tax return if you already filed. The sooner you catch the error, the easier it is to fix.