What gets taxed and what doesn't

The government taxes the interest your savings account earns, not the money you deposit. If you put $5,000 into a savings account, that $5,000 is not taxed. But if the bank pays you $50 in interest over the year, that $50 is taxable income.

The interest counts as ordinary income on your federal tax return. It gets taxed at your regular income tax rate, which depends on your total income and filing status. Some states also tax savings account interest, though a few do not.

Money you move between your own accounts—from checking to savings, or from one savings account to another—is never taxed. Transfers between accounts you own are not income.

Key Takeaways

  • Interest earned on savings accounts is taxed as ordinary income at your federal tax rate; the principal you deposit is not taxed.
  • Banks report interest of $10 or more on Form 1099-INT, which you receive by January 31 and must report on your tax return.
  • High-yield savings accounts earn more interest and therefore generate more taxable income than traditional savings accounts.
  • Some retirement accounts like traditional IRAs and 401(k)s defer taxes on interest until you withdraw the money; regular savings accounts do not offer this deferral.
  • Moving money between your own accounts is never taxed, regardless of how many times you transfer or how much you move.

How banks report interest to the IRS

If your savings account earned $10 or more in interest during the year, your bank sends you a Form 1099-INT by January 31. This form lists the interest amount and goes to the IRS as well. You must report this interest on your federal tax return, even if the bank did not send you a 1099-INT (though they will if the threshold is met).

The bank reports interest in the account holder's name and tax identification number. If you have a joint account, the bank typically reports all the interest to the primary account holder, though you and your spouse may need to split it on your return depending on your situation.

If you did not receive a 1099-INT but earned interest, you still owe tax on it. The IRS has records from the bank, so unreported interest creates a mismatch that can trigger a notice.

Why high-yield savings accounts create a bigger tax bill

A traditional savings account at a large bank might pay 0.01% annual interest. A high-yield savings account might pay 4% to 5%. On a $10,000 balance, that difference is roughly $1 per year versus $400 to $500 per year—all of which is taxable.

The higher interest is real money, but it comes with a real tax cost. If you are in the 22% federal tax bracket, earning $500 in interest means paying roughly $110 in federal tax on that interest. Some states add state income tax on top.

This does not mean high-yield accounts are a bad choice—the interest still exceeds the tax in most cases. But it means the after-tax return is lower than the advertised rate. A 4.5% high-yield account earning $450 in interest, after federal tax at 22%, nets you roughly $351.

Tax-advantaged accounts that defer or avoid interest tax

Regular savings accounts offer no tax break. But some accounts do defer or avoid tax on interest:

  • Traditional IRAs and 401(k)s: Interest and investment gains are not taxed while the money sits in the account. You pay tax when you withdraw in retirement.
  • Roth IRAs: Interest and gains are never taxed, even in retirement, as long as you follow withdrawal rules.
  • Health Savings Accounts (HSAs): Interest is not taxed if you use withdrawals for may have access to medical expenses.
  • 529 college savings plans: Interest is not taxed if you use the money for education expenses.

These accounts have contribution limits and withdrawal rules. A traditional IRA, for example, allows you to contribute up to $7,000 per year (as of 2024, though this changes), and you cannot withdraw before age 59½ without penalty in most cases. A regular savings account has no contribution limit and no withdrawal restrictions.

State taxes on savings interest

Most states tax savings account interest as ordinary income, explore their state income tax rate on top of federal tax. A few states do not tax interest income at all: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming have no state income tax.

Some states offer small exemptions. Illinois, for example, does not tax interest on savings accounts, but does tax other investment income. New Hampshire taxes interest and dividends but not wages. Check your state's rules if you live in a state with income tax.

If you live in a high-tax state and earn significant interest, moving money to a high-yield account in another state does not help—your state taxes based on where you live, not where the bank is located.

What happens if you earn very little interest

If your savings account earned less than $10, your bank will not send a 1099-INT. You still owe tax on the interest, but you report it on your return without the form. This is rare with traditional savings accounts but can happen with high-yield accounts if your balance is small.

If you earned no interest—because your account balance was zero or the bank paid nothing—there is nothing to report.

Frequently Asked Questions

Do I have to pay taxes on money I deposit into savings?

No. Money you deposit is not taxed. You already paid tax on that income when you earned it. Only the interest the bank pays you is taxed.

What if I have multiple savings accounts at different banks?

Each bank reports interest separately on its own 1099-INT. You add up all the interest from all accounts and report the total on your tax return. The IRS receives all the forms, so they know the total as well.

Can I avoid taxes by keeping my savings account balance low?

A lower balance means less interest earned, which means less tax owed. But the tax savings are small compared to the interest you lose. A $10,000 balance earning $400 in interest, taxed at 22%, costs you $88 in tax but gives you $312 in after-tax interest. A $1,000 balance earning $40 costs $8.80 in tax but gives you only $31.20.

Is interest from a savings account taxed differently than interest from a CD?

No. Both are reported on Form 1099-INT and taxed as ordinary income at your regular rate. A CD (certificate of deposit) often pays higher interest than a savings account, so it generates more taxable income, but the tax treatment is the same.

What if the bank made an error on my 1099-INT?

Contact the bank and ask them to issue a corrected form. If the error was significant, the bank will send you a corrected 1099-INT and file a corrected version with the IRS. Report the correct amount on your tax return, and keep the corrected form with your records.