You pay income tax on interest your savings account earns, but not on the money itself

The money you deposit into a savings account is yours — you do not owe tax on it. But the interest the bank pays you is income, and the IRS treats it the same way it treats wages or freelance earnings. If your account earns $10 in interest over a year, you report that $10 as taxable income on your tax return. The bank does not take the tax out automatically; you owe it when you file.

The amount of tax you actually pay depends on your overall income and tax bracket. Someone in the 22% bracket pays roughly 22 cents in federal tax on every dollar of interest earned. Someone in the 12% bracket pays roughly 12 cents. State income tax, where it exists, stacks on top of that. The key point: you are taxed on the interest, not the principal.

Key Takeaways

  • Interest earned in a savings account counts as taxable income and must be reported on your federal tax return.
  • The bank reports interest to the IRS on a Form 1099-INT if you earn $10 or more in a calendar year.
  • You pay tax at your marginal tax rate — the rate that applies to your highest income bracket — not a flat rate.
  • State income tax applies to savings interest in most states, and some cities also tax it.
  • 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.

When the bank reports your interest to the IRS

Banks send the IRS a Form 1099-INT for any account holder who earns $10 or more in interest during a calendar year. You receive a copy in January or early February. The form shows the exact amount of interest paid to your account in the previous year.

If you earn less than $10, the bank does not file a 1099-INT, but you still owe tax on the interest. You have to track it yourself and report it on your return. This is rare with modern savings accounts — even a traditional savings account earning 0.01% will hit $10 on a balance of $100,000 — but it happens with very small balances or accounts opened late in the year.

The 1099-INT arrives whether you withdraw the interest or leave it in the account. The IRS does not care what you do with the money; it only cares that you earned it.

How your tax bracket determines what you owe

You do not pay a flat tax rate on interest. Instead, you pay at your marginal tax rate — the percentage that applies to your highest bracket of income. If you earn $50,000 in wages and $500 in savings interest, that $500 is taxed at whatever bracket your $50,000 puts you in, not at a separate rate.

For 2024, the federal tax brackets are 10%, 12%, 22%, 24%, 32%, 35%, and 37%. A single filer earning $50,000 falls into the 22% bracket, so the $500 in interest is taxed at 22%, meaning roughly $110 in federal tax. A single filer earning $20,000 falls into the 12% bracket, so the same $500 in interest costs roughly $60 in federal tax.

This is why high-income earners pay more tax on savings interest than low-income earners, even if the interest amount is identical. The brackets shift each year for inflation, so the exact thresholds change annually.

State and local taxes on savings interest

Most states tax interest income the same way the federal government does — as ordinary income at your state tax rate. 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 dividend income, not wages). If you live in one of these states, you owe no state tax on savings interest.

In states that do tax income, the rate varies. New York charges up to 10.9% on top of federal tax. California charges up to 13.3%. Some cities — notably New York City — also tax income, adding another 3.876% for residents. A high-yield savings account earning $1,000 in interest could cost you $300 to $400 in combined federal, state, and local tax if you live in a high-tax area.

You report state and local tax on your state return, not your federal return. The bank does not withhold it; you owe it when you file your state taxes.

How much interest triggers a tax filing requirement

You must file a federal tax return if your income exceeds the standard deduction for your filing status. For 2024, the standard deduction is $14,600 for a single filer and $29,200 for married filing jointly. If your only income is $500 in savings interest, you do not have to file — you are below the threshold. But if you have wages or other income, you must file, and you must report the interest.

Some people file even when not required, usually to claim a refund. If you had taxes withheld from wages and earned interest, filing might get you money back. The interest itself does not trigger a filing requirement; your total income does.

The difference between high-yield and traditional savings accounts

A high-yield savings account might earn 4% to 5% annually, while a traditional savings account earns 0.01% to 0.05%. On a $10,000 balance, that is roughly $400 to $500 per year in interest versus $1 to $5. The tax on $400 is real; the tax on $1 is negligible.

But the after-tax return on a high-yield account is still higher. If you are in the 22% tax bracket, the $400 in interest costs you roughly $88 in tax, leaving you $312 ahead. The traditional account's $1 in interest costs you roughly 22 cents in tax, leaving you 78 cents. You come out far ahead with the high-yield account, even after paying tax.

The trade-off is not between paying tax and avoiding it — you pay tax either way. It is between earning more interest and paying more tax on that interest, or earning almost nothing and paying almost nothing in tax.

How to report interest on your tax return

When you file your federal return, you report interest income on Schedule B (if you have other investment income) or directly on Form 1040 (if interest is your only investment income). You list the name of the bank, the account number, and the amount of interest from your 1099-INT.

If you earned interest from multiple accounts, you add them all together and report the total. If one bank issued a 1099-INT for $150 and another for $75, you report $225 total. The IRS cross-checks this against the 1099-INT forms the banks filed, so the numbers must match.

You report state interest income on your state return using a similar process. Most state returns have a line for interest and dividend income. You attach a copy of your 1099-INT or list the amounts manually.

Frequently Asked Questions

Do I owe tax if I move money between my own savings accounts?

No. Moving money from one account to another is not income — it is a transfer. Only the interest the bank pays you is taxable. If you move $5,000 from savings account A to savings account B, you owe no tax on the $5,000. If account A paid you $10 in interest before you moved the money, you owe tax on that $10.

What if I close my savings account mid-year?

You still owe tax on all interest earned up to the closing date. The bank reports it on a 1099-INT for that year. If you close the account in June and earned $25 in interest, you report the full $25 on your tax return for that year, even though the account no longer exists.

Can I avoid taxes by keeping money in a savings account instead of investing?

No. Savings interest is taxable income. You cannot avoid tax by choosing a savings account over stocks or bonds — you straightforward earn less interest, so you owe less tax. The tax is on the earnings, not the choice of account.

Do I owe tax on interest if I do not withdraw it?

Yes. The IRS taxes interest the moment the bank credits it to your account, whether you withdraw it or leave it there. If your account earns $100 in interest and you never touch it, you still owe tax on that $100 when you file your return.

What happens if I do not report interest income?

The IRS receives a copy of your 1099-INT from the bank. If you do not report the interest on your return, the IRS notices the discrepancy and typically sends you a notice of underreported income. You then owe the tax plus interest and potentially penalties. It is easier and cheaper to report it correctly the first time.