You owe federal income tax on interest your savings account earns, and possibly state income tax too

Any interest your savings account generates counts as taxable income. The bank or credit union reports this to the IRS on a Form 1099-INT, and you report it on your tax return. The amount you owe depends on your total income for the year and your tax bracket — there is no flat rate on interest income.

The tax is owed in the year you earn the interest, even if you do not withdraw the money. If your account compounds interest monthly, you owe tax on that compounded amount each year, not just when you eventually move the money.

Most savings accounts earn so little interest that the tax burden is small. A $10,000 account earning 4.5% annually generates $450 in interest — taxed at your marginal rate, that might be $90 to $135 depending on your bracket. But the obligation exists regardless of the amount.

Key Takeaways

  • Banks report savings interest to the IRS on Form 1099-INT, which you receive by January 31 each year.
  • You owe federal income tax on all interest earned, taxed at your ordinary income rate — not a special rate.
  • Interest under $10 in a calendar year does not require a 1099-INT, but you still owe tax on it if you report all income.
  • Some states do not tax interest income, while others tax it the same way the federal government does.
  • High-yield savings accounts generate more interest, which means a larger tax bill — factor this into your planning.

How the IRS knows about your interest income

Your bank or credit union sends a Form 1099-INT to both you and the IRS by January 31 of the following year. This form lists all interest paid to your account during the previous calendar year. The IRS matches this against your tax return to see whether you reported it.

If you do not report interest income that appears on a 1099-INT, the IRS will likely catch it through automated matching. You will receive a notice asking for the missing income and any tax owed, plus penalties and interest on the unpaid amount.

Interest under $10 in a single calendar year does not trigger a 1099-INT, but you are still legally required to report it if you file a return. In practice, this rarely triggers IRS action, but the obligation remains.

What tax rate applies to your interest income

Interest is taxed as ordinary income, meaning it is added to your wages, self-employment income, and other earnings, then taxed at whatever bracket that total puts you in. There is no special lower rate for interest like there is for long-term capital gains.

If you earn $50,000 in wages and $500 in savings interest, the IRS treats you as having $50,500 in taxable income. That extra $500 is taxed at your marginal rate — the rate that applies to your highest dollars of income. For most people in 2024, that is between 12% and 24% federally, depending on filing status and total income.

Your actual tax bill on the interest is your marginal rate times the interest amount. Someone in the 22% bracket owing tax on $450 in interest pays roughly $99. Someone in the 12% bracket pays roughly $54 on the same interest.

State income tax on savings interest

Nine states have no income tax at all: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, Wyoming, and New Hampshire (which taxes only interest and dividends, but many savings accounts fall outside that). If you live in one of these states, you owe no state tax on your savings interest.

Every other state taxes interest income, though the rate and rules vary. Most states tax it the same way the federal government does — as ordinary income at your state tax rate. A few states have special rates or exemptions for certain types of interest, but savings account interest is almost always taxable.

Your state tax bill is separate from your federal bill. If you live in a state with a 5% income tax and earn $500 in interest, you owe roughly $25 to the state plus whatever you owe federally. The bank does not withhold state tax, so you may need to account for this when you file your state return or make estimated payments.

When you have very little interest income

If your total interest income for the year is below the standard deduction for your filing status, you may not owe any federal income tax at all — but you still have to report it on your return if you file one.

The standard deduction for 2024 is $14,600 for single filers and $29,200 for married filing jointly. If your wages plus interest plus all other income stays below these thresholds, your federal tax liability is zero. You still report the interest, but no tax is due.

This is common for people with small savings balances or those who are retired and living primarily on Social Security. The interest gets reported on the 1099-INT and on your return, but the actual tax owed is zero because your total income is low enough.

High-yield savings accounts and your tax bill

High-yield savings accounts currently offer rates between 4% and 5.35%, compared to 0.01% at many traditional banks. This means more interest earned — and a larger tax bill.

A $50,000 balance in a high-yield account earning 4.5% generates $2,250 in annual interest. At a 22% federal rate, that is roughly $495 in federal tax. Add state tax and the total can exceed $600. This is still a net gain — you keep the interest after taxes — but it is worth factoring into your planning if you are deciding between account types.

The tax does not change the math of whether a high-yield account is worth it. You still come out ahead compared to a traditional savings account. But it does mean the effective return is lower than the advertised rate. A 4.5% account earning you $2,250 might net you $1,650 after taxes, depending on your bracket.

Reporting interest on your tax return

Interest income goes on Schedule B (Interest and Ordinary Dividends) if you file Form 1040. You list each account or source of interest separately, then total them and transfer the amount to your main return.

If your total interest for the year is $1,500 or less and you have no other investment income, you can skip Schedule B and report the interest directly on Form 1040, line 1b. The IRS provides a worksheet to help you decide.

Most tax software walks you through this automatically. You enter the amount from your 1099-INT, and the software places it in the correct location on your return. If you file by hand, the Form 1040 instructions include the specific line numbers.

Frequently Asked Questions

Do I owe taxes on interest if I do not withdraw the money?

Yes. Tax is owed in the year the interest is earned, regardless of whether you withdraw it. If your account compounds interest monthly, you owe tax on the compounded total each year, even if the money stays in the account.

What if I earned less than $10 in interest?

You will not receive a 1099-INT, but you are still required to report the interest if you file a tax return. The IRS rarely pursues amounts this small, but the legal obligation exists. Include it on Schedule B or directly on your return.

Can I deduct savings account fees against my interest income?

No. Interest income is reported in full, and account fees are not deductible against it. You can deduct investment-related fees in limited circumstances, but routine savings account maintenance fees do not may have access to.

Do I owe taxes on interest from a joint account?

The bank reports the full interest amount on a 1099-INT. If the account is jointly owned, you and the co-owner must decide how to split the income for tax purposes — usually 50/50, but it depends on your ownership agreement. Coordinate with the co-owner so you do not both report the full amount.

What if I moved money between accounts during the year?

You owe tax on all interest earned in that calendar year, regardless of how many times you moved the money. Each account will report its own interest on a separate 1099-INT. Add them all together when you file your return.