Savings account interest counts as income the IRS taxes
Yes. Any interest your savings account earns is taxable income. The IRS treats it the same way it treats wages or salary — you have to report it on your tax return, and you may owe federal income tax on it. Some states tax it too. This applies to every type of savings account: regular savings, money market accounts, certificates of deposit (CDs), and high-yield savings accounts.
The amount you owe depends on how much interest you earned and your overall income for the year. If you earned very little interest — say, $10 across the whole year — you may not owe anything because your total income stays below the threshold where you have to file. But the bank will still report it to the IRS, and you should report it too.
The bank sends you a form called a 1099-INT (Interest Income) by January 31 each year. This form lists all the interest you earned at that bank. If you have accounts at multiple banks, you'll get a separate 1099-INT from each one. You use these forms to fill out your tax return.
Key Takeaways
- All savings account interest is taxable income and must be reported to the IRS on your tax return.
- Banks send you a 1099-INT form by January 31 listing the interest you earned, which you use when filing taxes.
- The tax you owe depends on your total income for the year and your tax bracket, not just the interest amount.
- If you earned less than $1,200 in interest across all accounts in 2024, you may not have to file a return, but you should still report the income.
- Some states impose their own income tax on savings interest in addition to federal tax.
How the IRS taxes interest at different income levels
The tax you pay on savings interest depends on your tax bracket — the percentage of your income that goes to federal tax. If you earn $30,000 a year and your savings account earns $500 in interest, that $500 gets added to your $30,000, making your taxable income $30,500. You pay tax on the full amount at your bracket rate.
In 2024, federal tax brackets for single filers range from 10% (on income up to $11,600) to 37% (on income over $578,100). So if you're in the 22% bracket and earn $500 in interest, you owe roughly $110 in federal tax on that interest alone. If you're in the 10% bracket, you owe about $50.
The higher your total income, the higher your bracket, and the more you pay on the interest. This is why someone earning $100,000 a year pays more tax on $500 in interest than someone earning $30,000 does — even though they earned the same amount of interest.
When you have to report interest to the IRS
You must report all interest income on your tax return, even if the bank doesn't send you a 1099-INT. However, banks are only required to send a 1099-INT if you earned $10 or more in interest during the year. If you earned less than $10, the bank doesn't send the form, but you still owe tax on it if your total income requires you to file.
Whether you have to file a return at all depends on your total income and filing status. For 2024, single filers under age 65 don't have to file if their income is below $13,850. But if you're self-employed or have other special circumstances, the threshold is lower. The safest approach is to report all interest, no matter how small.
If you have multiple savings accounts at different banks, each bank sends its own 1099-INT. You add up all the interest from all the forms and report the total on your return. The IRS cross-checks what the banks reported, so underreporting or omitting interest can trigger an audit.
State income tax on savings interest
In addition to federal tax, most states tax savings interest as income. The rate varies by state. Some states, like Florida, Texas, and Wyoming, don't have a state income tax at all, so you owe nothing to the state. Others, like California and New York, tax interest at rates up to 13% or more.
A few states have special rules. Illinois, for example, doesn't tax interest income at all — only capital gains. Some states exempt interest earned by residents over a certain age. Check your state's tax authority website or a tax professional to learn what applies to you.
If you live in a state with income tax and earn interest, you'll report it on your state return the same way you report it federally — using the 1099-INT from your bank. The state gets a copy of the form too.
How high-yield savings accounts change the picture
High-yield savings accounts earn much more interest than traditional savings accounts — sometimes 4% to 5% annually, compared to 0.01% or less at big banks. This means you earn more taxable income. If you have $10,000 in a high-yield account earning 4.5%, you earn $450 in interest per year, which is fully taxable.
The tax owed on that $450 is the same as on any other interest: it depends on your bracket. But because you're earning more, the tax bill is larger. Someone in the 22% bracket owes about $99 on $450 in interest. This is still worth it if the higher rate beats what you'd earn elsewhere, but it's important to factor the tax into your decision.
Some people move money to high-yield accounts specifically to earn more interest, then use that interest to cover taxes or reinvest it. Just remember: the interest is taxable whether you spend it, reinvest it, or leave it alone.
Certificates of deposit and other savings products
CDs work the same way as savings accounts for tax purposes. The interest you earn is taxable income, reported on a 1099-INT, and added to your income for the year. If you have a CD that matures and you withdraw the money, you report the interest earned up to that point.
If you cash in a CD early and pay an early withdrawal penalty, you can deduct that penalty from the interest income on your tax return. So if you earned $200 in interest but paid a $50 penalty, you report $150 in interest income. This is one of the few deductions available for savings interest.
Money market accounts and savings bonds follow similar rules. Any interest earned is taxable. The only exception is U.S. Treasury bonds, which are exempt from state income tax but still subject to federal tax.
What to do if you didn't receive a 1099-INT
If you earned $10 or more in interest but didn't receive a 1099-INT by February 15, contact the bank directly. Ask them to send it or provide the interest amount so you can report it yourself. Don't assume you don't owe tax just because the form didn't arrive.
If the bank can't locate the form or won't send it, you can still report the interest on your return. Write down the account number, the bank name, and the amount of interest you earned. The IRS may follow up to verify, but reporting it yourself protects you from penalties for underreporting.
If you receive a 1099-INT with an incorrect amount, contact the bank to request a corrected form (called a 1099-INT correction). The bank will send a corrected form to you and the IRS. Don't ignore the error — the IRS has a copy of the original form and will notice if your return doesn't match.
Frequently Asked Questions
Do I have to pay tax on interest if I reinvest it instead of withdrawing it?
Yes. The IRS taxes interest the year you earn it, regardless of whether you withdraw it, spend it, or leave it in the account. Reinvesting doesn't change the tax owed. You still report it on your return and owe tax based on your bracket.
What if my savings interest is very small, like $5 for the whole year?
You still owe tax on it if your total income requires you to file a return. The bank won't send a 1099-INT for amounts under $10, but you should still report it. If your total income is below the filing threshold for your status, you may not have to file, but reporting it is the safest approach.
Can I deduct savings account fees from the interest I report?
No. You report the full interest amount on your return. Fees are not deductible against interest income. However, if you paid investment advisory fees or tax preparation fees related to your savings, those may be deductible in limited situations — consult a tax professional.
Do I report interest from a joint savings account differently?
The bank reports the full interest amount on a single 1099-INT. If the account is jointly owned, you and the co-owner should split the interest income based on your ownership percentage and report your share on your return. The bank doesn't split it for you, so you need to coordinate with the co-owner.
What happens if I don't report savings interest on my tax return?
The IRS receives a copy of the 1099-INT from the bank. If your return doesn't show that interest, the IRS will likely send you a notice asking for an explanation. You may owe back taxes, plus interest and penalties. Reporting it when you file is much simpler than dealing with an audit later.