Savings account interest counts as income the IRS taxes
Yes, you owe federal income tax on the interest your savings account earns. The bank treats this interest the same way it treats wages or salary — as income you received. Your bank will report it to the IRS, and you report it on your tax return each year.
The amount of tax you pay depends on your total income and your tax bracket, not on how much interest you earned. If you earned $50 in interest and your tax bracket is 22%, you do not automatically owe $11. Instead, that $50 gets added to all your other income, and your total tax is calculated on the combined amount. This means the tax on your interest could be higher or lower than 22%, depending on what else you earned that year.
Some states also tax savings interest, though the rules vary by state. A few states do not tax interest income at all. Check your state's tax authority website or ask a tax preparer whether your state taxes savings interest.
Key Takeaways
- Banks report savings interest to the IRS on a Form 1099-INT, and you must report it on your federal tax return.
- The interest is taxed as ordinary income at your regular tax rate, not at a special rate.
- You owe tax on interest even if the amount is small — there is no minimum threshold before the IRS considers it taxable income.
- Some states tax savings interest and some do not, so check your state's rules separately from federal tax.
- High-yield savings accounts earn more interest than traditional accounts, which means you will owe more tax on the earnings.
When the bank reports your interest to the IRS
Your bank sends you a Form 1099-INT each January if you earned at least $10 in interest during the previous year. This form shows exactly how much interest you earned in that account. The bank also sends a copy to the IRS, so the IRS already knows about your interest before you file your return.
You do not have to wait for the 1099-INT to arrive before reporting the interest. If you earned interest but the bank has not sent the form yet, you can still report it on your tax return using the amount shown in your account statements. However, most people wait for the 1099-INT because it is the official record and reduces the chance of a mismatch between what you report and what the IRS received.
If you have multiple savings accounts at different banks, you will receive a separate 1099-INT from each bank. When you file your taxes, you add up all the interest from all the forms and report the total.
How much tax you actually owe on the interest
The tax on your interest depends on your overall income and filing status, not just on the interest amount itself. If you earned $100 in interest and your income is very low, you might owe no federal tax at all because your total income falls below the threshold where tax begins. If your income is high, that same $100 in interest might be taxed at 24% or higher.
This is why two people earning the same $100 in interest can owe different amounts of tax. The interest gets added to their other income — wages, self-employment earnings, retirement distributions, and so on — and the total determines the tax rate.
You can estimate your tax using the IRS tax tables or a tax calculator, but the exact amount will not be clear until you file your complete return and see your total income for the year.
Reporting interest on your tax return
If you file your taxes using Form 1040 (the main federal income tax form), you report your interest income on Schedule 1, which is an attachment to Form 1040. You list the total interest from all your 1099-INT forms in the box labeled "Interest" and add it to your other income.
If you use tax software, the program will ask you to enter the interest amount, and it will automatically place it in the correct location on your return. If you work with a tax preparer or accountant, bring your 1099-INT forms with you, and they will handle the reporting.
You do not need to attach the 1099-INT forms to your return when you mail it, but you should keep copies for your records. If you file electronically, the software transmits the information directly to the IRS.
Interest from different types of savings accounts
All savings interest is taxed the same way, regardless of the account type. A high-yield savings account, a money market account, or a traditional passbook savings account all generate taxable interest. The difference is the amount: a high-yield account might earn 4% or 5% annually, while a traditional savings account might earn 0.01%, so you will owe tax on a much larger amount from the high-yield account.
Certain accounts like Roth IRAs and traditional IRAs have different tax rules — the interest inside those accounts is not taxed each year the way regular savings interest is. But if you have a regular savings account (not a retirement account), all the interest is taxable income in the year you earn it.
What happens if you do not report the interest
The IRS receives a copy of every 1099-INT your bank sends. If you do not report the interest on your tax return, the IRS will notice the mismatch between what you reported and what the bank reported. This can trigger a notice asking you to explain the difference or pay the tax you owe plus penalties and interest.
Even if the amount is small, reporting it is the safest approach. The cost of filing an amended return to report interest you missed is usually much less than the cost of penalties and interest the IRS charges if they catch the error first.
Frequently Asked Questions
Do I have to pay tax on interest if I earned less than $10?
The bank does not have to send you a 1099-INT if you earned less than $10, but you still owe tax on the interest. You report it on your return using your account statement. The $10 threshold is only about whether the bank sends the form, not about whether the income is taxable.
Can I deduct savings account fees from the interest I report?
No. You report the full interest amount on your tax return. Savings account fees are not deductible on most tax returns. You pay tax on the interest and separately absorb the cost of the fees.
What if I moved money between accounts during the year — do I pay tax twice?
No. You only pay tax on the interest earned, not on the money you moved. If you transferred $5,000 from one savings account to another, that transfer is not income. You pay tax only on the interest that money earned in each account.
Do I report interest from a joint savings account differently?
If the account is jointly owned, the bank typically reports all the interest to one owner on the 1099-INT. You and the other owner should agree on how to split the interest for tax purposes and report your share on your individual return. Keep documentation of this agreement in case the IRS asks.