You pay federal income tax on interest your savings account earns, but only if that interest reaches a certain threshold

The IRS treats savings account interest as taxable income. That means if your account earns $10 in interest over a year, those $10 are subject to federal income tax at your regular tax rate. Your bank will report this interest to the IRS on a Form 1099-INT if the amount reaches $10 or more in a calendar year. You then report it on your tax return.

The $10 threshold is the reporting requirement, not the taxable amount. Even if your account earns $5 in interest, you still owe federal tax on it—your bank just won't send you a 1099-INT form. You would report the interest yourself on your return. Some states also tax savings interest, though the rules vary by location.

The actual tax you pay depends on your total income and tax bracket. If you earn $5,000 in interest and you're in the 22% federal tax bracket, you owe roughly $1,100 in federal tax on that interest alone. The interest itself is added to your other income, which can push you into a higher bracket.

Key Takeaways

  • Banks report savings interest to the IRS on Form 1099-INT when it reaches $10 or more in a year, but you owe tax on any amount.
  • The tax rate on interest depends on your total income and filing status, not on a fixed rate for savings.
  • Some states tax savings interest and some do not; check your state's rules if you live outside the federal system.
  • High-yield savings accounts earn more interest, which means a larger tax bill—but the after-tax return is usually still higher than traditional savings.

How the IRS knows about your interest

Your bank automatically sends interest information to the IRS and to you. By January 31 of the following year, the bank mails you a Form 1099-INT showing all interest paid to your account during the previous calendar year. The bank sends a copy to the IRS at the same time. If you have accounts at multiple banks, you'll receive a separate 1099-INT from each one.

You then report this interest on your federal tax return. On Form 1040, interest income goes on Schedule 1 (Other Income). If you file electronically, the software usually walks you through entering the 1099-INT information. If you file by hand, you transfer the total from all your 1099-INT forms to the appropriate line on your return.

The IRS cross-checks the 1099-INT forms it receives from banks against the interest you report on your return. If the numbers don't match, you may receive a notice. For this reason, it's important to report all interest, even small amounts, even if you didn't receive a 1099-INT.

What counts as interest and what doesn't

Interest is money the bank pays you for keeping your money there. It's calculated as a percentage of your balance and posted to your account monthly, quarterly, or annually depending on the bank. This interest is always taxable. A savings account earning 4.5% APY will generate taxable interest every month.

Bonuses paid by banks for opening an account or meeting deposit requirements are also taxable income, though they're reported differently—usually on a Form 1099-MISC rather than a 1099-INT. A $200 sign-up bonus counts as income in the year you receive it.

Transfers between your own accounts are not income and not taxable. Moving $5,000 from checking to savings doesn't create a tax event. Only the interest the bank pays on the balance is taxable.

How your tax bracket affects what you owe

Savings interest is added to your other income—wages, self-employment income, investment gains—and taxed at your marginal rate. If you earn $50,000 in wages and $2,000 in savings interest, the IRS treats you as having $52,000 in income. The tax on that $2,000 depends on your bracket.

For 2024, the federal tax brackets vary by filing status. A single filer in the 22% bracket pays roughly $440 in federal tax on $2,000 of interest. A married couple filing jointly in the 12% bracket pays roughly $240 on the same $2,000. The interest itself doesn't have a separate tax rate; it's taxed as ordinary income at whatever rate applies to your total income.

This is why high-income earners pay more tax on savings interest than lower-income earners. The same $1,000 in interest costs a person in the 37% bracket $370 in federal tax, but only $100 to someone in the 10% bracket.

State and local taxes on savings interest

Most states tax savings interest as ordinary income, explore their state income tax rate to the interest you earn. New York, California, and Texas all tax savings interest, though at different rates. A few states—including Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming—have no state income tax at all, so residents pay no state tax on savings interest.

Some states offer limited exemptions. Illinois, for example, exempts interest income entirely from state tax. Missouri exempts interest earned on certain types of savings accounts. Check your state's Department of Revenue website to see how your state treats savings interest.

Local taxes vary as well. Some cities and counties impose an additional income tax on top of state tax. If you live in a place with local income tax, that tax also applies to your savings interest.

The difference between high-yield and traditional savings accounts

A high-yield savings account earns more interest than a traditional savings account—often 4% to 5% compared to 0.01% at a traditional bank. This means more interest income and a larger tax bill. But the after-tax return is usually still higher. If you earn $500 in interest at 4.5% APY and pay 22% federal tax plus 5% state tax, you keep roughly $365 after taxes. At 0.01% APY, you'd earn $1 in interest and keep roughly $0.73 after taxes.

The tax on higher interest is a cost of earning more. It doesn't make high-yield savings a bad choice—it just means you should factor the tax into your planning. If you're in a high tax bracket, the after-tax yield matters more than the advertised rate.

Some people use tax-advantaged accounts like Roth IRAs or 529 plans to earn interest without paying tax on it. But those accounts have contribution limits and withdrawal rules. For general savings outside those accounts, you'll pay tax on the interest no matter where you keep the money.

Frequently Asked Questions

Do I have to report savings interest if I didn't get a 1099-INT?

Yes. The $10 threshold is only for the bank's reporting requirement. If your account earned $5 in interest and the bank didn't send a 1099-INT, you still report that $5 on your tax return. The IRS expects all interest income to be reported.

What if I have multiple savings accounts?

Each bank sends a separate 1099-INT. You add up all the interest from all your accounts and report the total on your return. If you have accounts at five different banks, you'll receive five 1099-INT forms, but you report one combined interest figure on your tax return.

Can I deduct savings account fees from the interest I report?

No. You report the full interest amount the bank paid you. Fees you paid to the bank are not deductible against that interest. However, if you have significant investment expenses, you may be able to deduct them under other rules—consult a tax professional about your specific situation.

Does moving money between my own accounts create a tax event?

No. Transferring funds between accounts you own is not income. Only the interest the bank pays on your balance is taxable. Moving $10,000 from checking to savings doesn't create any tax consequence.

What happens if I don't report savings interest on my tax return?

The IRS receives a copy of your 1099-INT from the bank and will notice if you don't report it. You may receive a notice of underreported income and owe back taxes plus penalties and interest. It's simpler to report the interest when you file.