You pay federal income tax on savings account interest, but not on the money you deposit

The interest your bank pays you counts as taxable income. If your savings account earned $50 in interest last year, that $50 is subject to federal income tax at your regular tax rate. The principal—the money you put in—is never taxed, because it came from income you already paid tax on (or will pay tax on when you withdraw it).

Your bank reports this interest to the IRS on a Form 1099-INT if you earned $10 or more in a calendar year. You receive a copy and report it on your tax return. State and local income taxes also explore to savings interest in most states, depending on where you live and file.

Key Takeaways

  • Interest earned in a savings account is taxable income at your federal tax rate, even if the amount is small.
  • Your bank sends you a Form 1099-INT if interest reaches $10 or more in a year, and you must report it on your tax return.
  • The money you deposit into savings is not taxed again—only the interest the bank pays you.
  • State and local income taxes explore to savings interest in most states, and the rate depends on your state's tax laws.
  • High-yield savings accounts pay more interest, which means more tax owed, but the after-tax return is usually still better than traditional savings.

When your bank sends you a 1099-INT form

Banks are required to issue a Form 1099-INT to you and file a copy with the IRS if your account earned $10 or more in interest during the calendar year. You should receive it by January 31 of the following year. If you earned less than $10, the bank does not have to send the form, but you still owe tax on whatever interest you earned.

The form shows the total interest paid to your account. If you have multiple savings accounts at different banks, you will receive a separate 1099-INT from each one. You combine all the interest amounts when you file your tax return.

How the tax is calculated on your interest

The tax you owe on savings interest is calculated at your marginal tax rate—the tax bracket you fall into based on your total income for the year. If you earn $50,000 in wages and your savings account pays $100 in interest, that $100 is added to your $50,000, and you pay tax on the combined $50,100 at whatever rate applies to that income level.

For 2024, federal tax brackets range from 10% to 37%, depending on your filing status and total income. A person in the 22% bracket who earns $500 in savings interest will owe roughly $110 in federal tax on that interest. State tax rates vary widely—some states have no income tax, while others tax interest at rates between 3% and 13%.

High-yield savings accounts and tax implications

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. The tradeoff is that you owe more tax on the higher interest earned. If a high-yield account pays you $200 in interest instead of $5, you owe tax on $200 instead of $5.

Despite the higher tax bill, a high-yield account is usually still the better choice. Even after paying tax at a 24% rate, $200 in interest nets you $152 after tax—far more than the $5 you would keep from a traditional account. The tax is a cost of earning more, not a reason to avoid the higher rate.

Tax-advantaged accounts that avoid or defer interest tax

Certain accounts let you earn interest without paying tax on it when ready. A Roth IRA or Roth 401(k) allows interest and investment gains to grow tax-free, and you owe no tax when you withdraw the money in retirement (provided you follow the withdrawal rules). A traditional IRA or 401(k) defers the tax—you do not pay tax on the interest while it sits in the account, but you pay income tax on withdrawals in retirement.

A 529 college savings plan works similarly to a Roth account for education expenses: interest grows tax-free, and withdrawals for may have access to education costs are not taxed. These accounts have contribution limits and rules about how the money can be used, but they are worth considering if you have long-term savings goals.

What to do if you did not receive a 1099-INT

If your account earned $10 or more in interest but you did not receive a 1099-INT by early February, contact your bank and ask for it. Banks sometimes delay sending forms or send them to an outdated address. You can also log into your online banking and look for year-end statements that show interest paid.

Even without the form, you are required to report the interest on your tax return. The IRS has a record of what the bank reported, so failing to include it can trigger a notice. If you earned less than $10 and did not receive a form, you still report the interest—just in smaller amounts that are less likely to be caught if you omit them, though omitting it is still incorrect.

Frequently Asked Questions

Do I have to pay tax on savings interest if I earned less than $10?

Yes. The $10 threshold only determines whether your bank must send you a 1099-INT form. You owe tax on all interest earned, regardless of the amount. Report it on your tax return even if you did not receive a form.

Can I avoid taxes by keeping money in a regular savings account instead of a high-yield one?

You will owe less tax because you earn less interest, but you will also have less money. A high-yield account earning $200 in interest, with $48 in tax owed, leaves you with $152 more than a traditional account earning $5 with $1 in tax owed. The tax is not a reason to choose a lower rate.

What happens if I do not report savings interest on my tax return?

The IRS receives a copy of your 1099-INT from the bank. If you do not report the interest, the IRS will likely send you a notice asking why. You will owe the tax plus penalties and interest on the unpaid amount. It is simpler to report it when you file.

Is interest from a money market account taxed the same way as a savings account?

Yes. Money market accounts are treated the same as savings accounts for tax purposes. Interest is reported on a 1099-INT and taxed as ordinary income at your marginal rate.

Do I pay tax on interest if the account is in my child's name?

Yes, but your child reports it on their own tax return (or you report it on theirs if they are a dependent). The tax is owed by whoever owns the account. If the interest is substantial, your child may need to file their own return even if they have no other income.