Yes, the interest your savings account earns is taxed as income

The money you deposit into a savings account is yours and not taxed. But the interest the bank pays you on that money counts as income to the IRS, and you owe federal income tax on it. Some states also tax savings interest. The amount of tax depends on how much interest you earned and your overall income for the year.

This is different from the principal — the original money you put in. You already paid tax on that money when you earned it (or it came from after-tax sources). The interest is new income, so it gets taxed like wages or other earnings.

Key Takeaways

  • Interest earned in a savings account is taxed as ordinary income at your federal tax rate, which ranges from 10% to 37% depending on your total income.
  • Banks send you a Form 1099-INT each January if you earned $10 or more in interest during the previous year, and you must report this on your tax return.
  • Some states tax savings interest as income, while others do not, so your state tax bill depends on where you live.
  • Interest earned in a child's savings account may be taxed at the child's rate rather than the parent's rate, which can result in lower taxes.

How the IRS knows about your interest

At the end of each year, your bank calculates all the interest it paid you. If that total is $10 or more, the bank sends you a Form 1099-INT and also sends a copy to the IRS. This form shows exactly how much interest you earned.

You receive the 1099-INT by January 31 of the following year. For example, if you earned interest during 2024, you get the form in January 2025. When you file your federal tax return, you report the amount from this form. The IRS already has a copy, so they will notice if your return does not match.

If you earned less than $10 in interest, the bank does not send a 1099-INT, but you may still owe tax on that interest. You would report it yourself on your return.

What tax rate applies to your interest

Savings interest is taxed as ordinary income, meaning it is taxed at the same rate as wages or salary. The federal rate depends on your total income for the year and your filing status. The rates range from 10% to 37%, with higher earners paying higher percentages.

For example, if you are single and earned $35,000 in wages plus $200 in savings interest, that $200 is taxed at whatever rate applies to your $35,200 total income. You do not pay a special "interest rate" — it all gets taxed together.

This is different from long-term capital gains or may have access to dividends, which have their own lower tax rates. Savings interest does not get that treatment.

State taxes on savings interest

Most states that have an income tax also tax savings interest. The state rate is usually separate from federal tax and is added on top. Some states tax interest at a flat rate (the same percentage for everyone), while others use a graduated system like the federal government does.

A few states do not tax interest income at all. These include Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming. If you live in one of these states, you owe federal tax on your interest but not state tax.

If you live in a state that taxes interest, you report the same 1099-INT amount on your state return as you do on your federal return.

Interest earned in a child's account

If you open a savings account for a child and put money in it, the interest belongs to the child and is taxed as the child's income, not yours. This can actually lower the total tax owed, because the child may have a lower tax rate or may not owe tax at all if their income is below the threshold.

For 2024, a dependent child with less than $1,300 in unearned income (like interest) typically owes no federal tax. If the child has more than that, they file their own return and pay tax at their own rate, which is usually lower than an adult's rate.

The child receives their own 1099-INT if they earned $10 or more. You do not report the child's interest on your own return.

How to reduce the tax on savings interest

The most straightforward way to reduce tax on savings interest is to earn less interest — which means having less money in savings. That is not practical information for most people. A more realistic approach is to keep money in accounts that earn very little interest, since the tax is proportional to the interest earned.

High-yield savings accounts earn more interest than traditional savings accounts, which means more tax. If you are in a high tax bracket, the after-tax return on a high-yield account might still be worth it, but the math is worth checking. A 4% interest rate sounds good until you realize 30% of it goes to taxes, leaving you with 2.8% after tax.

Some people use tax-advantaged accounts like IRAs or 401(k)s to shelter savings from annual tax. Interest earned inside these accounts is not taxed each year — you pay tax only when you withdraw the money, and sometimes not at all (depending on the account type). These accounts have contribution limits and withdrawal rules, so they are not a fit for all savings.

What happens if you do not report the interest

If you receive a 1099-INT and do not report the interest on your tax return, the IRS will likely catch it. The IRS receives a copy of every 1099-INT sent to you, and their computers match those forms to the returns filed. A missing or mismatched amount can trigger an audit notice.

Even small amounts matter. Failing to report $50 in interest might seem minor, but it can result in penalties and interest charges on the unpaid tax, plus the cost of dealing with an IRS notice.

Frequently Asked Questions

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

The bank does not send a 1099-INT for amounts under $10, but you still owe tax on that interest if you have any tax liability. Report it on your return even without the form. If your total income is low enough that you owe no tax anyway, you may not need to file, but check the IRS filing requirements for your situation.

Can I deduct savings account fees from the interest I report?

No. You report the full interest amount shown on the 1099-INT. Fees are not deducted from that number. You may be able to deduct investment-related fees on your tax return, but savings account maintenance fees are generally not deductible.

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

Contact your bank and ask them to issue a corrected form. They will send you a corrected 1099-INT and also send the correction to the IRS. Report the corrected amount on your tax return. Keep the corrected form with your tax records.

Is interest from a money market account taxed the same way?

Yes. Money market accounts, savings accounts, and certificates of deposit all earn interest that is taxed as ordinary income. You receive a 1099-INT for any of these accounts if the interest is $10 or more, and you report it the same way.