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

The money you put into a savings account is yours — you do not owe tax on it. But the interest the bank pays you counts as income. The IRS treats savings account interest the same way it treats wages or freelance income: you report it on your tax return, and you owe federal income tax on it at your ordinary income tax rate.

Your bank will send you a Form 1099-INT each January if you earned $10 or more in interest during the previous year. This form shows exactly how much interest you earned. You use this number when you file your federal tax return. Some states also tax interest income, though the rules vary by state.

The amount of tax you owe depends on your total income and your tax bracket. Someone in the 22% tax bracket pays 22 cents in federal tax for every dollar of interest earned. Someone in the 12% bracket pays 12 cents. The interest itself is small enough that for most people, the tax owed is also small — but it is still owed.

Key Takeaways

  • Interest earned in a savings account is taxable income; the principal you deposit is not.
  • Banks send Form 1099-INT when you earn $10 or more in interest, and you must report this on your federal tax return.
  • You pay tax on savings interest at your ordinary income tax rate, which depends on your total income and filing status.
  • Some states tax interest income in addition to federal tax, though rules differ by state.
  • High-yield savings accounts earn more interest, which means more tax owed, but the after-tax return is usually still higher than traditional savings accounts.

How the IRS knows about your interest income

Your bank tracks every penny of interest it pays you. At the end of the calendar year, the bank generates a Form 1099-INT and sends copies to both you and the IRS. The IRS receives its copy electronically, so they know what interest you earned whether you report it or not.

The $10 threshold means small accounts often do not trigger a 1099-INT. If you earned $8 in interest, your bank may not send the form. But you are still required to report the interest if you file a tax return — the form is just a convenience for larger amounts. The IRS can cross-check your return against bank records even without the form.

If you have multiple savings accounts at different banks, each bank sends its own 1099-INT. You add all the interest together when you file. If you moved money between accounts during the year, only the interest actually earned counts — moving your own money does not create taxable income.

What happens if you do not report savings interest

The IRS matches 1099-INT forms to tax returns automatically. If your return shows no interest income but your bank reported interest to the IRS, the agency will notice. They may send you a notice asking for the missing income, plus penalties and interest on the unpaid tax.

The penalty for not reporting income is usually 20% of the unpaid tax, though it can be higher if the IRS determines the omission was intentional. Interest accrues on the unpaid tax at a rate set quarterly — currently around 8% per year. For a small amount of interest income, the penalty and interest can exceed the original tax owed.

If you straightforward forgot to report interest, you can file an amended return (Form 1040-X) and pay what you owe. The IRS is usually more lenient with honest mistakes than with deliberate omissions, especially for small amounts.

How to report savings interest on your tax return

When you file your federal return, you report interest income on Schedule B (Interest and Ordinary Dividends) if you earned more than $1,500 in interest and dividends combined. If you earned $1,500 or less, you can report the interest directly on Form 1040 without using Schedule B.

You enter the total interest from all your savings accounts on one line. The form asks for the total, not a breakdown by account. If you have a 1099-INT, the box labeled "Interest income" shows the number you use. If you did not receive a form but earned interest, you calculate the total yourself from your bank statements.

Interest income flows into your adjusted gross income (AGI), which affects your tax bracket and may change other deductions or credits you are may have access to to. This is why high interest years can sometimes increase your overall tax bill beyond just the tax on the interest itself.

State taxes on savings account interest

Most states that have an income tax also tax interest income. The state tax rate varies — some states tax interest at the same rate as wages, while others have a separate rate for investment income. A few states do not tax interest at all.

States that do not tax interest income include Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming. If you live in one of these states, you owe federal tax on savings interest but no state income tax on it. If you live elsewhere, check your state's tax rules or ask your tax preparer.

Some states offer small exemptions for interest income — for example, allowing the first $100 or $200 to be tax-free. These exemptions are rare and usually explore only to residents over a certain age. Your state tax return instructions will specify if any exemption applies to you.

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% annually, compared to 0.01% or less at many traditional banks. This means more interest income, and therefore more tax owed. But the after-tax return is usually still higher.

If you earn $500 in interest at a high-yield account and owe 22% federal tax plus 5% state tax (27% combined), you keep $365 after tax. At a traditional account earning $10 in interest with the same tax rate, you keep $7.30. The high-yield account still comes out ahead even after paying more tax.

The tax on interest is one reason some people use tax-advantaged accounts like Roth IRAs or 529 plans for savings. Interest earned inside these accounts is not taxed annually — you pay tax only when you withdraw the money, or not at all in the case of Roth accounts. But these accounts have contribution limits and withdrawal rules that do not explore to regular savings accounts.

Frequently Asked Questions

Do I have to report interest if I earned less than $10?

Your bank does not send a 1099-INT for interest under $10, but you still owe tax on it if you file a return. Report the actual amount you earned, even if it is $2 or $5. The IRS can see your account activity through other means.

What if I earned interest in a joint account?

The bank reports the full interest amount on a 1099-INT. If the account is truly joint, you and the other owner should split the interest proportionally on your individual returns. Keep documentation of how you divided it in case the IRS asks.

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 for most people. You pay tax on the interest and absorb the fees separately.

Do I owe tax on interest if I am a dependent?

Yes. Interest income is taxable regardless of your age or dependent status. A dependent with interest income may still need to file a return, depending on the total amount and other income. Check IRS rules for dependent filing requirements.

What if my bank made a mistake on the 1099-INT?

Contact your bank and ask them to issue a corrected 1099-INT (marked as a correction). They will send the corrected form to you and the IRS. Use the corrected amount on your tax return. Keep the original form for your records.