Interest from your savings account is taxed as income

Any interest your bank pays you on a savings account counts as income to the IRS, and you owe federal income tax on it. Most savings accounts earn very little interest — sometimes less than 1% per year — so the tax bill is usually small. But the rule is straightforward: if the bank paid you interest, you report it on your tax return.

Your bank will send you a form called a 1099-INT (Interest Income) if you earned $10 or more in interest during the year. Even if you earn less than $10, you still owe tax on it — you just won't receive the form. The interest amount appears on your tax return as ordinary income, taxed at whatever your regular income tax rate is.

Some states and cities also tax interest income, though the rules vary widely. A few states don't tax interest at all, while others tax it the same way the federal government does. Check your state's tax website or ask a tax preparer if you're unsure whether your state taxes savings interest.

Key Takeaways

  • The IRS taxes all savings account interest as ordinary income, regardless of how small the amount.
  • Your bank sends you a 1099-INT form only if you earned $10 or more in interest that year, but you owe tax on smaller amounts too.
  • The tax rate on interest is the same as your regular income tax rate, which depends on your total income and filing status.
  • Some states and cities tax interest income, while others do not — check your state's rules.
  • High-yield savings accounts earn more interest than traditional savings accounts, which means a larger tax bill but also more money in your account.

How the IRS knows about your interest

Banks report interest payments to the IRS automatically through the 1099-INT form. Your bank keeps a copy for its records, sends one to you, and sends one to the IRS. This happens every January for interest earned in the previous calendar year. Because the IRS receives the same form, they know how much interest you earned even if you forget to report it.

If you have multiple savings accounts at different banks, you may receive more than one 1099-INT form. You add up all the interest from all the forms and report the total on your tax return. If you move money between accounts at the same bank, that does not count as interest — only the money the bank paid you counts.

What tax rate applies to your interest

Interest is taxed at your marginal tax rate, which is the tax bracket you fall into based on your total income for the year. If you earn $30,000 a year and your tax bracket is 12%, then interest you earn is also taxed at 12%. If you earn $80,000 and your bracket is 22%, your interest is taxed at 22%.

This matters because it means the tax on interest is not a flat percentage — it depends on how much other income you have. Someone with very little income might owe no federal tax at all, even on interest, because their income falls below the standard deduction. Someone with high income pays a higher percentage on the same amount of interest.

You do not pay tax on the interest until you file your return, usually in April of the following year. The money stays in your account and earns more interest in the meantime. You pay the tax from other money you have, not by the bank withholding it automatically (unless you ask them to, which is rare).

High-yield savings accounts and taxes

A high-yield savings account earns significantly more interest than a traditional savings account — sometimes 4% to 5% per year instead of 0.01%. This means you earn more money, but you also owe more tax on that interest. The tax treatment is identical: it all counts as ordinary income and goes on your 1099-INT form.

The math usually still favors a high-yield account. If you earn $500 in interest at a high-yield rate and owe $110 in tax (at a 22% rate), you still come out $390 ahead compared to earning $10 in interest at a traditional account and owing $2 in tax. The higher interest more than makes up for the higher tax bill.

Some people move money to high-yield accounts specifically because they want to earn interest that actually matters, even though it creates a tax obligation. Others prefer traditional accounts because the interest is so small that the tax is negligible. Both approaches are reasonable — it depends on how much money you have saved.

Reporting interest on your tax return

When you file your federal tax return, you report interest income on Schedule 1 (Additional Income and Adjustments to Income), which attaches to Form 1040. You enter the total interest from all your 1099-INT forms in the box labeled "Interest." If you use tax software, it usually walks you through entering this information and pulls it into the right place automatically.

If you received a 1099-INT but the amount is wrong, contact your bank and ask them to issue a corrected form. If you earned interest but did not receive a 1099-INT (because it was under $10), you still report it — you just have to remember the amount yourself.

If you file taxes with a preparer or accountant, bring all your 1099-INT forms with you. They will make sure the interest is reported correctly and will let you know what your tax bill is.

Interest from joint accounts and accounts for minors

If you have a joint savings account with another person, the bank reports the interest to both of you on separate 1099-INT forms, usually splitting it 50-50 unless you tell them otherwise. You each report your share on your own tax return. This is common for married couples with joint accounts.

If you open a savings account for a minor child, the interest is taxed to the child, not to you as the parent. The bank will issue a 1099-INT in the child's name. A child with very little income may owe no tax at all, even on interest, because their income is below the standard deduction. This is one reason some parents use savings accounts in their children's names — the tax bill is smaller or nonexistent.

Frequently Asked Questions

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

Yes. The $10 threshold only determines whether the bank sends you a 1099-INT form. You still owe tax on all interest, no matter how small. If you earned $5 in interest and did not receive a form, you still report that $5 on your tax return.

Can I deduct the tax I pay on interest from my taxes?

No. Interest income is added to your total income, and you pay tax on it at your regular rate. You cannot deduct the tax itself. However, if you have investment losses or certain other deductions, those might lower your overall tax bill.

What happens if I don't report interest on my tax return?

The IRS receives a copy of your 1099-INT from the bank, so they know you earned the interest. If you do not report it, the IRS will likely send you a notice asking why. It is simpler and safer to report it when you file.

Is interest taxed differently if I'm retired?

No. Interest is taxed the same way regardless of your age or employment status. However, retirees may have lower overall income, which could put them in a lower tax bracket, meaning the tax on interest is a smaller percentage.

Do I pay taxes on interest if I move the money to a different bank?

Yes. Moving money between accounts does not change the tax treatment. Interest earned in one account is taxed the same as interest earned in another. The bank that paid the interest issues the 1099-INT, not the bank you moved it to.