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. The interest the bank pays you is income, and the IRS treats it the same way it treats wages or other earnings. You will owe federal income tax on that interest at your regular tax rate. Whether you owe state or local tax depends on where you live.

The amount of interest you earn on a typical savings account is usually small enough that many people do not think about it. But the bank reports what you earned to the IRS, and you have to report it too. If you do not, the IRS will notice the mismatch between what the bank reported and what you claimed.

Key Takeaways

  • Banks report savings account interest to the IRS on a Form 1099-INT, and you must report the same amount on your tax return.
  • You owe federal income tax on interest at your regular tax bracket, whether the amount is $1 or $1,000.
  • If you earned less than $10 in interest during the year, the bank may not send you a Form 1099-INT, but you still owe tax on it.
  • Some states do not tax interest income, while others tax it as regular income—check your state's rules or ask your tax preparer.
  • High-yield savings accounts earn more interest than traditional accounts, which means a larger tax bill, but the after-tax return is usually still better.

How the IRS finds out about your interest income

Your bank sends a Form 1099-INT to both you and the IRS each January. This form lists every dollar of interest you earned in the previous year. The IRS matches what the bank reported against what you claim on your tax return. If you do not report the interest, the IRS computer system flags the discrepancy and you may receive a notice asking you to explain the difference or pay the tax you owe plus penalties.

If you earned less than $10 in interest during the year, federal law does not require the bank to send you a Form 1099-INT. However, you still owe tax on that interest. Many people assume that if they do not receive the form, they do not have to report it. That is not true. You are responsible for reporting all interest income, whether or not you receive a form.

What tax rate applies to your interest income

Interest income is taxed as ordinary income, which means it is added to your wages, self-employment income, and any other earnings you have. Your total income determines which tax bracket you fall into, and that bracket is the rate you pay on the interest.

If you earn $50,000 in wages and $500 in savings account interest, your taxable income is $50,500. The interest is taxed at whatever rate applies to that $50,500 total. For 2024, federal tax brackets range from 10% to 37%, depending on your income and filing status. Your state may also tax the interest at its own rate, which varies widely.

This is different from long-term capital gains, which are taxed at lower rates. Interest is always taxed as ordinary income, no matter how long the money sits in the account.

State and local taxes on savings interest

Nine states do not tax interest income at all: Alaska, Florida, Illinois, Mississippi, Nevada, South Dakota, Tennessee, Texas, and Wyoming. If you live in one of these states, you owe no state income tax on your savings interest, though you still owe federal tax.

Every other state taxes interest as ordinary income. Some states have a lower rate for interest than for wages, but most treat it the same. A few states exempt a small amount of interest income—for example, some allow you to exclude the first $100 or $200 per year. Check your state's tax website or ask a tax preparer what applies where you live.

Local taxes on interest are rare but do exist in some cities and counties. If you live in a place with a local income tax, ask your local tax authority whether interest is taxed.

How to report interest on your tax return

When you file your federal return, you report interest income on Schedule B (if you have more than $1,500 in interest) or directly on Form 1040 (if you have less). You list the name of each bank and the amount of interest you earned. If you have only one account and received a Form 1099-INT, you straightforward enter the amount from that form.

If you earned interest but did not receive a Form 1099-INT because the amount was under $10, you still enter it on your return. Keep your own records—a screenshot of your year-end statement or a note from your bank showing the interest earned is enough.

Many tax software programs ask you to enter your Form 1099-INT information, and they automatically put it in the right place on your return. If you use a tax preparer, bring all your 1099-INT forms with you.

Why high-yield savings accounts still make sense despite taxes

A high-yield savings account might earn 4% to 5% interest, while a traditional savings account earns 0.01%. That higher rate means more interest income and a larger tax bill. But even after taxes, the high-yield account usually leaves you with more money.

If you have $10,000 in a high-yield account earning 4.5% and you are in the 24% federal tax bracket, you earn $450 in interest and owe $108 in federal tax. Your after-tax gain is $342. In a traditional account earning 0.01%, you earn $1 and owe about 24 cents in tax, leaving you with 76 cents. The high-yield account is still far ahead, even after paying tax on the larger interest.

The tax on interest is a cost of earning more, not a reason to avoid accounts that pay better rates.

Frequently Asked Questions

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

Yes. The bank does not have to send you a Form 1099-INT if you earned less than $10, but you still owe tax on it. The IRS expects you to report all interest income. Keep your own records from your bank statements to prove what you earned.

What if I have multiple savings accounts at different banks?

Each bank sends its own Form 1099-INT. You report the interest from each one on your tax return. If you use tax software, you enter each form separately. The total interest from all accounts is what matters for your tax bill.

Can I deduct the taxes I pay on savings interest?

No. Interest income is taxed, but the tax itself is not deductible. You straightforward owe tax on the full amount of interest earned. There is no way to reduce the taxable interest itself unless the interest was earned in a tax-advantaged account like a Roth IRA or 529 plan.

Do I owe taxes on interest in a joint savings account?

Yes, but how the tax is split depends on how the account is titled. If both owners are listed equally, the bank may report half the interest to each person's Social Security number. If one person is listed as the owner, the bank reports all interest to that person. Confirm with your bank how they will report it, and make sure both owners report their share on their own tax returns.

What if I moved money between savings accounts during the year?

Moving money between your own accounts does not create a tax event. You only owe tax on the interest the money earned, not on the transfers themselves. Each bank reports the interest earned in accounts you held there during the year.