You pay federal income tax on interest your savings account earns, but not on the money you deposit
The deposits you put into a savings account are not taxable — that is money you already earned and paid tax on. The interest the bank pays you on that balance, however, counts as income to the IRS. You report it on your federal tax return each year, and you may owe income tax on it depending on how much interest you earned and your overall income.
The bank will send you a form called a 1099-INT (Interest Income) if you earned $10 or more in interest during the year. Even if you earn less than $10, you still owe tax on it — the $10 threshold is just when the bank is required to send you the form. You are responsible for reporting all interest income, whether or not you receive a 1099-INT.
State and local income taxes may also explore to savings interest, depending on where you live. Some states do not tax interest income at all; others tax it the same way the federal government does. Check your state's tax authority website or ask a tax preparer about your specific location.
Key Takeaways
- Interest earned on savings accounts is taxable income at the federal level and must be reported on your tax return.
- Banks send a 1099-INT form when interest reaches $10 or more in a calendar year, but you owe tax on all interest regardless of the amount.
- The principal (money you deposited) is never taxable; only the interest the bank pays you is.
- State and local taxes on savings interest vary by location — some states do not tax it at all.
- High-yield savings accounts earn more interest, which means a larger tax bill, so factor that into your planning.
How the IRS tracks your savings interest
Banks are required to report interest payments to both you and the IRS. If your account earned $10 or more in interest during the calendar year, the bank mails you a 1099-INT by January 31 of the following year. This form shows the total interest paid and goes to the IRS at the same time, so the agency knows what you earned.
If you earned less than $10, you will not receive a 1099-INT, but you still must report the interest on your tax return. The IRS expects you to track it yourself. Keep your monthly or quarterly statements from the bank as proof of what you earned.
The 1099-INT lists interest in Box 1. If you have multiple savings accounts at different banks, you will receive a separate 1099-INT from each one. When you file your tax return, you add up all the interest from all your accounts and report the total.
When your tax bill actually increases because of savings interest
Whether you owe additional tax depends on your total income and tax bracket. If you earn $50 in interest and your income is already high enough that you are in the 24% federal tax bracket, you will owe roughly $12 in federal tax on that interest. If your income is lower and you are in the 10% bracket, you owe roughly $5.
Some people with very low income do not owe federal income tax at all, even if they have savings interest. The IRS sets a standard deduction — an amount of income you can earn without owing tax. For 2024, the standard deduction is $14,600 for single filers and $29,200 for married couples filing jointly. If your total income (including interest) is below that threshold, you owe no federal income tax.
However, you may still be required to file a return even if you owe no tax, depending on your situation. A tax preparer or the IRS website can tell you whether filing is required in your case.
High-yield savings accounts and your tax bill
High-yield savings accounts pay significantly more interest than traditional savings accounts — sometimes 4% to 5% annually, compared to 0.01% or less at many large banks. That higher interest is taxable income, just like interest from any other account. A $10,000 balance in a high-yield account earning 4.5% generates $450 in interest per year, which is taxable.
The trade-off is worth it for many people: earning $450 in interest and paying tax on it is better than earning $1 and paying nothing. But if you are in a high tax bracket or have other income, the tax bill on high-yield interest can be substantial. Plan for it by setting aside some of the interest you earn, rather than spending it all.
Some people move money to high-yield accounts specifically for short-term savings goals, then move it back to a regular account once they reach their target. This strategy does not reduce your tax bill — you still owe tax on all interest earned — but it can help you reach your goal faster.
What happens if you do not report savings interest
The IRS receives a copy of every 1099-INT your bank sends you. If you do not report the interest on your tax return, the IRS will notice the discrepancy. The agency may send you a notice asking you to file an amended return and pay the tax you owe, plus interest on the unpaid amount and possibly penalties.
The penalty for not reporting income is typically 20% of the unpaid tax, though it can be higher if the IRS determines the omission was intentional. Interest accrues on unpaid taxes at a rate set quarterly by the IRS — currently around 8% annually, though this changes. A $100 tax bill that goes unpaid for two years can grow to $116 or more.
If you made an honest mistake, contact the IRS or a tax professional to file an amended return. The sooner you correct it, the less interest and penalties accumulate.
Strategies to reduce the tax impact of savings interest
You cannot avoid paying tax on interest you earn, but you can be strategic about where you keep your money. If you have a large emergency fund that sits in a regular savings account earning almost nothing, moving it to a high-yield account increases your interest income but also increases your tax bill. The math usually favors the move — earning $200 in interest and paying $50 in tax is better than earning $5 and paying nothing — but run the numbers for your situation.
If you have a spouse and file taxes jointly, consider whose name the account is in. Interest is taxable to whoever owns the account. This matters if one spouse has significantly lower income than the other; putting the savings account in the lower-income spouse's name may result in a lower overall tax bill, depending on your tax bracket.
Retirement accounts like IRAs and 401(k)s offer tax-deferred or tax-free growth on savings and interest. If you have earned income, you may be able to contribute to these accounts and avoid paying tax on the interest they generate each year. Consult a tax professional about whether this strategy fits your situation.
Frequently Asked Questions
Do I have to report savings interest if I earned less than $10?
Yes. The $10 threshold is only when banks must send you a 1099-INT form. You are responsible for reporting all interest income on your tax return, no matter the amount. Keep your bank statements as proof of what you earned.
What if I have savings accounts at multiple banks?
You will receive a separate 1099-INT from each bank if interest reaches $10 at that institution. When you file your return, add up the interest from all accounts and report the total. The IRS receives copies of all your 1099-INTs, so they know your total interest income.
Can I deduct savings account fees from the interest I report?
No. You report the full interest amount the bank paid you. If your account has a monthly fee that reduces your balance, that fee is not deductible against the interest. However, investment-related fees may be deductible in some cases — ask a tax professional.
Does a minor's savings account get taxed differently?
Interest on a minor's savings account is taxable to the minor, not the parent. The minor must report it on their own tax return if the amount is large enough to require filing. Some minors with very low interest income may not be required to file. Check IRS rules for dependents or consult a tax preparer.
What if the bank made an error and paid me too much interest?
You still owe tax on the interest the bank actually paid you, even if it was a mistake. If the bank later corrects the error and reduces your balance, they will issue a corrected 1099-INT. Report the corrected amount on your tax return.