The government taxes the interest your savings account earns, not the balance itself

Your savings account balance—the money you deposited—is never taxed by the federal government. The money you put in is yours, and it stays yours. What gets taxed is the interest your bank pays you on that balance. If your account earns $50 in interest over a year, that $50 is taxable income. The original balance is not.

Your bank reports this interest to the IRS on a form called a 1099-INT (Interest Income). You receive a copy, and you report it on your federal tax return. State and local governments may also tax this interest, depending on where you live. The tax rate depends on your overall income and tax bracket, not on the size of your savings.

Most savings accounts earn so little interest that many people owe no tax on it at all. The IRS has a threshold: banks must report interest to the IRS only if it reaches $10 or more in a calendar year. Even if your interest is reported, you may owe no tax if your total income is low enough.

Key Takeaways

  • The money you deposit into a savings account is never taxed—only the interest the bank pays you is subject to federal income tax.
  • Your bank sends you a 1099-INT form each January reporting interest of $10 or more, and you report this on your tax return.
  • You may owe no tax on savings interest if your total income falls below the standard deduction for your filing status.
  • State and local taxes on savings interest vary by location and are separate from federal tax.
  • High-yield savings accounts earn more interest, which means more taxable income, but the interest is still only taxed once per year.

When you owe federal tax on savings interest

Whether you owe federal tax on savings interest depends on your total income for the year, not just the interest amount. The IRS sets a standard deduction—an amount of income you can earn without owing federal tax. If your total income (including wages, interest, and other sources) is below the standard deduction, you owe no federal tax, even if your bank reports interest.

For 2024, the standard deduction is $14,600 for a single person and $29,200 for a married couple filing jointly. These amounts change each year. If you are a dependent claimed on someone else's return, the rules are different and more restrictive. If you earned only $500 in interest and no other income, and you are single, you would owe no federal tax because $500 is well below $14,600.

If your income exceeds the standard deduction, you report the interest on your tax return and pay tax on it at your marginal rate. That rate depends on your total income and filing status. Someone in the 12% tax bracket who earns $100 in savings interest owes $12 in federal tax on that interest (before any credits or deductions reduce the bill).

How the 1099-INT form works and what to do with it

In late January or early February each year, your bank mails or emails you a 1099-INT if you earned $10 or more in interest during the previous calendar year. The form shows the total interest paid to you. You receive two copies: one to file with your tax return and one to keep for your records. The IRS also receives a copy directly from the bank.

When you file your federal tax return, you report the interest shown on the 1099-INT. If you use tax software, you enter the amount from Box 1 of the form. If you file by hand, you report it on Schedule B (Interest and Ordinary Dividends) if you have more than $1,500 in interest, or directly on Form 1040 if you have $1,500 or less. The exact line depends on the year and your filing status.

If your bank fails to send you a 1099-INT but you earned interest, you still must report it. Keep your own records—your monthly statements show the interest paid each month. If the bank reports interest to the IRS but the amount is wrong, contact the bank to request a corrected form (called a 1099-INT correction or amended 1099-INT). The bank has until March 15 to send corrections.

State and local taxes on savings interest

Federal tax is not the only tax on savings interest. Most states with an income tax also tax interest income. The state tax rate and rules vary widely. Some states tax interest at the same rate as wages; others have a lower rate or exempt certain types of savings. A few states—including Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming—have no state income tax at all, so residents pay no state tax on savings interest.

Some cities and counties also impose local income taxes that explore to interest. Ohio, Pennsylvania, and Kentucky have local taxes in some jurisdictions. If you live in a place with local income tax, you report the same interest to the local tax authority as you do to the IRS and state. The local rate is usually lower than the state rate.

If you move during the year, you may owe tax to more than one state. The rules for apportioning income between states are complex and depend on when you moved and where you lived. If this applies to you, a tax professional can help you file correctly in each state.

The difference between high-yield and regular savings accounts for tax purposes

A high-yield savings account earns significantly more interest than a regular savings account—sometimes 4% to 5% annually, compared to 0.01% or less at many traditional banks. This higher interest means more taxable income. If you have $10,000 in a high-yield account earning 4.5%, you earn $450 in interest per year. That $450 is reported on a 1099-INT and is taxable. A regular savings account with the same $10,000 earning 0.01% generates only $1 in interest, which may not even be reported.

The tax treatment is identical—both are taxed as ordinary income at your marginal rate—but the dollar amount you owe is much higher with a high-yield account. This does not mean high-yield accounts are a bad choice. The extra interest you earn usually far exceeds the extra tax you pay. Someone earning $450 in interest and owing $54 in federal tax (at 12%) still comes out $396 ahead compared to earning $1 in interest and owing nothing.

If you are in a very high tax bracket, the tax on high-yield savings interest may be significant enough to influence where you keep your money. Some people use tax-advantaged accounts like Roth IRAs or 529 plans to earn interest without when ready tax. These have contribution limits and other rules, so they are not a replacement for regular savings accounts.

What happens if you do not report savings interest on your tax return

If your bank reports interest to the IRS on a 1099-INT and you do not report it on your tax return, the IRS will notice. The IRS receives copies of all 1099-INT forms and matches them to tax returns. If the interest does not appear on your return, the IRS may send you a notice asking why. If you owed tax on that interest and did not pay it, you will owe the tax plus interest and possibly penalties.

The IRS interest rate on unpaid taxes changes quarterly and is currently around 8% per year. Penalties for failing to report income can be 20% of the unpaid tax. If the IRS determines you intentionally hid income, the penalty can be higher. Even if you made an honest mistake, you will still owe the back tax and interest.

If your interest is below $10 and your bank does not report it, you are still required to report it if your total income exceeds the standard deduction. The fact that the bank did not send a 1099-INT does not erase the obligation. Keep your own records and report all interest, even small amounts.

Frequently Asked Questions

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

Banks only report interest of $10 or more on a 1099-INT. However, you are still required to report all interest on your tax return if your total income exceeds the standard deduction. If you earned $5 in interest and no other income, and you are single, you owe no tax because $5 is below the $14,600 standard deduction. Keep your statements as proof of the amount.

Can I avoid taxes on savings interest by opening multiple accounts?

No. The IRS taxes all your interest income combined, regardless of how many accounts you have or which banks hold them. If you have five savings accounts earning $50 each, that is $250 in taxable interest total. Banks report interest by your Social Security number, so the IRS sees all your accounts together.

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

Contact your bank when ready and ask for a corrected form. The bank must issue a correction (an amended 1099-INT) and send it to you and the IRS by March 15. Do not file your tax return until you have the corrected form. If you already filed and the amount was wrong, you can file an amended return (Form 1040-X) once you have the corrected 1099-INT.

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

Yes. Money market accounts, savings accounts, and certificates of deposit (CDs) are all taxed the same way—the interest is reported on a 1099-INT and taxed as ordinary income. The account type does not matter for tax purposes, only the interest earned.

Do I owe taxes on interest if I am claimed as a dependent?

Yes, but the rules are stricter. For 2024, a dependent can earn up to $1,300 in interest before owing federal tax (the standard deduction for a dependent is lower than for an independent person). If you earn more than $1,300 in interest, you must file a return and report it. Your parents cannot claim the interest as their income—it is yours to report.