The IRS taxes the interest your savings account earns, not the money you deposit

The money you put into a savings account is yours — the IRS does not tax it when it goes in or when you withdraw it. What the IRS does tax is the interest your bank pays you for keeping money there. Interest is the small amount of money the bank gives you as a reward for letting them use your deposits. If your account earns $10 in interest over a year, that $10 is taxable income to you.

Your bank tracks this interest and reports it to the IRS on a form called a 1099-INT (Interest Income). You receive a copy in January or February each year. The amount reported is usually small — most savings accounts earn very little interest — but even small amounts count as income the IRS wants to know about.

The threshold for reporting is low. If you earned $10 or more in interest during the year, your bank must send you a 1099-INT. If you earned less than $10, the bank does not have to report it, but the interest is still technically taxable.

Key Takeaways

  • Your bank reports savings account interest to the IRS on a 1099-INT form, which you receive each January or February.
  • Interest earned is taxed as ordinary income at your regular tax rate, not at a special lower rate.
  • Banks must report interest of $10 or more, though amounts under $10 are still taxable even if not reported.
  • High-yield savings accounts earn more interest than traditional savings accounts, which means more taxable income but also more money in your account.

How interest income appears on your tax return

When you file your taxes, you report the interest from your 1099-INT on your federal tax return. The form goes to the IRS automatically — your bank sends a copy to you and a copy to the IRS. If you do not report it and the IRS notices the mismatch, they will contact you.

The interest is added to your other income and taxed at your regular income tax rate. If you are in the 12% tax bracket, interest is taxed at 12%. If you are in the 22% bracket, it is taxed at 22%. There is no special lower rate for savings account interest — it is treated the same as wages or salary.

If you have multiple savings accounts at different banks, each bank sends its own 1099-INT. You add all the interest together when you file your return.

When interest is so small it barely matters

Most traditional savings accounts earn interest so slowly that the tax impact is minimal. A savings account with $1,000 earning 0.01% per year generates $0.10 in interest — below the $10 reporting threshold and essentially no tax burden.

High-yield savings accounts pay more interest, sometimes 4% to 5% per year depending on the market. That same $1,000 in a high-yield account might earn $40 to $50 per year, which means $5 to $11 in federal taxes (depending on your bracket), plus any state income tax. The interest is still real money in your account, but you owe tax on it.

The key point: earning interest is a good thing, even if you owe tax on it. You are still ahead because the interest itself is yours to keep after taxes.

State income tax on savings interest

Most states that have an income tax also tax savings account interest the same way the federal government does. Your state tax rate applies to the same interest amount your bank reports on the 1099-INT.

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 savings interest but no state tax.

Some states offer small exemptions for interest earned by older adults or people with disabilities, but these are narrow and vary by state. Your state tax return instructions will tell you whether any exemption applies to you.

What happens if you earn interest but do not receive a 1099-INT

If you earned less than $10 in interest, your bank does not send a 1099-INT. You still owe tax on that interest, but you report it yourself on your return — the IRS does not have a record of it unless you tell them.

If you earned $10 or more and your bank did not send you a 1099-INT by early February, contact the bank and ask for it. Banks sometimes mail them late, or they may have your address wrong. Do not file your return without it — if the IRS receives a 1099-INT from the bank and you did not report it, they will send you a notice.

If you switch banks during the year, you may receive multiple 1099-INTs from different banks. Add all the interest together on your return.

How to minimize taxes on savings interest

You cannot avoid the tax, but you can be strategic about where you keep your money. High-yield savings accounts earn more interest, which means more tax, but also more actual money. A high-yield account earning 4.5% on $10,000 gives you $450 in interest and roughly $100 in federal tax (at 22% bracket), leaving you $350 ahead. A traditional account earning 0.01% on the same $10,000 gives you $1 in interest and almost no tax, but you are only $1 ahead.

Some people use certificates of deposit (CDs) or money market accounts to earn higher interest while keeping money separate from everyday spending. These also generate 1099-INT forms and are taxed the same way as savings accounts.

If you have a very large amount of money, you might work with a tax professional to understand how interest income affects your overall tax situation, especially if it pushes you into a higher tax bracket or affects other benefits you receive.

Frequently Asked Questions

Do I have to pay taxes on money I deposit into savings, or only on interest?

Only on interest. Money you deposit is yours and not taxed. The IRS only taxes the interest the bank pays you for keeping the money there.

What if I earned interest but the bank closed my account before sending the 1099-INT?

Contact the bank and request the 1099-INT. Banks are required to send it even if the account is closed. If the bank cannot locate it, ask for a written statement of the interest earned so you can report it on your return.

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

No. You report the full interest amount on the 1099-INT. Fees are a separate issue — some are deductible as miscellaneous expenses, but the rules are strict and most people cannot claim them.

Does moving money between my own savings accounts create taxable income?

No. Transferring your own money between accounts is not income. Only the interest the bank pays you is taxable.

What if I earned interest in a joint account — do both people owe tax on it?

The bank reports the full interest on a 1099-INT to whoever is listed as the primary account holder. That person reports it on their tax return. If you and the other account owner want to split the tax burden, you handle that between yourselves — the IRS sees only what the bank reports.