You don't pay capital gains tax on savings account interest — you pay ordinary income tax instead
Capital gains tax applies when you sell an asset (like stocks or real estate) for more than you paid for it. Savings account interest is not a capital gain. The money you earn from interest is treated as ordinary income, which means it's taxed at your regular income tax rate, not the lower capital gains rate.
The IRS requires banks to report interest earned over $10 in a single year on a Form 1099-INT. You'll receive this form by January 31 of the following year, and you must report that interest on your federal tax return. The amount owed depends on your tax bracket, not on how long you held the money in the account.
Key Takeaways
- Savings account interest is taxed as ordinary income at your regular tax rate, not as a capital gain.
- Banks report interest over $10 annually on Form 1099-INT, which you receive by January 31.
- You owe federal income tax on all interest earned, even if the bank doesn't send you a 1099-INT.
- High-yield savings accounts earn more interest but are still taxed as ordinary income.
- Some states also tax savings account interest, depending on where you live and the account type.
How the IRS treats savings account interest
The IRS classifies savings account interest as unearned income — money you didn't work for directly, but earned from your money sitting in an account. This category also includes dividend income, bond interest, and rental income. All of it is taxed at your ordinary income tax rate, which ranges from 10% to 37% depending on your total income and filing status.
This is different from capital gains, which get preferential tax treatment. Long-term capital gains (assets held over one year) are taxed at 0%, 15%, or 20% depending on your income level — rates that are usually lower than ordinary income tax rates. Because savings account interest doesn't involve buying and selling an asset, it doesn't may have access to for this break.
The tax is owed in the year the interest is earned, not when you withdraw it. If you earned $50 in interest in 2024, you owe tax on that $50 in 2024, even if you don't touch the account until 2025.
What happens when you receive a 1099-INT form
If your savings account earned more than $10 in interest during the calendar year, your bank will send you a Form 1099-INT by January 31. This form shows the total interest earned and goes to both you and the IRS. You report this amount on your federal tax return — usually on Schedule B (Interest and Ordinary Dividends) if you have other investment income, or directly on Form 1040 if it's your only interest income.
The bank sends the form whether or not you've withdrawn the money. The interest is taxable in the year it was earned, even if it's still sitting in your account. If you have multiple savings accounts, each bank sends its own 1099-INT, and you add them all together on your return.
If you earned less than $10 in interest, the bank doesn't have to send you a 1099-INT, but you still owe tax on that interest. You report it on your return based on your own records — the bank statement or account statements you receive.
Federal tax rates on savings account interest
Your tax rate on savings interest depends on your total taxable income and your filing status. If you're in the 22% tax bracket, every dollar of interest is taxed at 22%. If you're in the 12% bracket, it's 12%. The interest is added to your other income, so a large interest amount could push you into a higher bracket.
For 2024, the federal tax brackets are:
| Filing Status | 10% Bracket | 12% Bracket | 22% Bracket | 24% Bracket |
|---|---|---|---|---|
| Single | $0–$11,600 | $11,601–$47,150 | $47,151–$100,525 | $100,526–$191,950 |
| Married Filing Jointly | $0–$23,200 | $23,201–$94,300 | $94,301–$201,050 | $201,051–$383,900 |
These brackets change each year. If you earned $500 in interest and you're single with $50,000 in other income, your total taxable income becomes $50,500, and the interest is taxed at whatever rate applies to that amount.
State and local taxes on savings interest
Most states tax savings account interest as ordinary income, using rates that range from 0% to over 13% depending on the state. A few states don't tax interest income at all: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming have no state income tax. New Hampshire and Tennessee tax only dividend and interest income, not wages.
Some states offer tax breaks for certain types of accounts. For example, a few states exempt interest earned in accounts designated for education savings or retirement. Check your state's tax authority website or speak with a tax preparer to understand your state's rules — they vary significantly.
If you live in a city with a local income tax (such as New York City or Columbus, Ohio), you may also owe local tax on the interest. This is less common but does explore in some areas.
High-yield savings accounts and tax liability
High-yield savings accounts earn more interest than traditional savings accounts — sometimes 4% to 5% annually compared to 0.01% or less at major banks. This higher interest is still taxed as ordinary income at your regular rate. The tax advantage goes to capital gains, not to interest income, so earning more interest means owing more tax.
If you earn $1,000 in interest from a high-yield account and you're in the 24% federal tax bracket, you owe $240 in federal tax on that interest. The higher the rate the account pays, the larger your tax bill. This doesn't mean high-yield accounts are a bad choice — the interest still grows your money — but it's important to factor the tax into your planning, especially if you're relying on that interest for living expenses.
Frequently Asked Questions
Do I owe taxes on interest if I didn't withdraw the money?
Yes. The IRS taxes interest in the year it's earned, whether you leave it in the account or withdraw it. If your account earned $200 in interest in 2024, you owe tax on that $200 in 2024, even if the money is still sitting there on December 31.
What if I earned less than $10 in interest?
You still owe tax on it. The bank doesn't have to send a 1099-INT for amounts under $10, but you report the interest on your return based on your account statements. The IRS expects you to report all interest income.
Can I deduct savings account fees from the interest I earned?
No. You report the full interest amount on your tax return. Savings account fees are not deductible. However, if you have investment-related expenses (like fees paid to a financial advisor for managing taxable investments), those may be deductible under certain conditions — ask a tax preparer about your specific situation.
Is interest from a money market account taxed differently?
No. Money market accounts are treated the same way as savings accounts for tax purposes. The interest is ordinary income, reported on Form 1099-INT if it exceeds $10, and taxed at your regular income tax rate.
What if I move money between savings accounts — do I owe capital gains?
No. Moving money between your own accounts is not a taxable event. You only owe tax on the interest the accounts earn, not on the transfers themselves.