The IRS taxes interest your bank pays you, not the balance itself
The money sitting in your savings account is not taxed by the IRS just because it exists there. What gets taxed is the interest your bank pays you on that balance. If you have $10,000 in savings and earn $50 in interest over a year, the IRS wants to know about and tax that $50—not the $10,000.
Your bank reports this interest to the IRS on a form called a 1099-INT (Interest Income). You receive a copy, and the IRS receives a copy. The interest counts as ordinary income on your tax return, taxed at your regular income tax rate, which varies depending on your total income and filing status.
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. Some banks send them even for smaller amounts. Either way, you are responsible for reporting all interest income to the IRS, even if you do not receive a 1099-INT.
Key Takeaways
- The IRS taxes interest earned on savings account balances, not the principal amount you deposited.
- Your bank reports interest income to the IRS on a 1099-INT form, which you receive by January 31 each year.
- Interest income is taxed as ordinary income at your regular tax rate, regardless of how long the money sat in the account.
- You must report all interest income on your tax return, even if the amount is small or you did not receive a 1099-INT.
When your bank sends you a 1099-INT
Banks mail 1099-INT forms by January 31 of the following year. If you earned interest during 2024, you will receive the form by January 31, 2025. The form shows the total interest paid to you during that calendar year across all accounts you hold at that bank.
If you have accounts at multiple banks, each bank sends its own 1099-INT. You will receive one from your primary savings bank, another from any money market account provider, and so on. The IRS also receives copies of all of them, so they can cross-check your reported income against what the banks reported.
If you did not receive a 1099-INT but earned interest, contact your bank and ask for one. Some banks issue them only upon request, or they may have sent it to an old address. You still owe tax on that interest whether or not you have the form in hand.
How interest income affects your tax bill
Interest income is added to your other income—wages, self-employment earnings, investment gains—and taxed at your marginal tax rate. If you earn $50,000 in wages and $500 in savings account interest, your taxable income is $50,500. The interest is taxed at whatever bracket that total income puts you in.
For most people with modest savings, the tax impact is small. A savings account earning 4% annual interest on $10,000 generates $400 in interest, which might add $80 to $120 to your federal tax bill depending on your bracket. But the amount matters: someone with $500,000 in savings earning the same rate pays significantly more.
Some savings vehicles reduce or defer this tax. A Roth IRA or Roth 401(k) lets interest grow tax-free. A traditional IRA defers the tax until you withdraw the money. A regular savings account offers no such shelter, so you pay tax on the interest each year it is earned.
Interest income from different account types
A standard savings account, money market account, and certificate of deposit (CD) all generate taxable interest. High-yield savings accounts earn more interest than traditional savings accounts, which means more taxable income—but the higher rate is still worth it for most people because the after-tax return is better than a low-yield account.
Interest from a joint account is reported to the IRS under the primary account holder's Social Security number, but both owners are responsible for reporting their share of the interest on their own tax returns. If you and your spouse each own half of a joint savings account, you each report half the interest income.
Interest from accounts held in a trust or estate is reported differently and may be taxed at the trust or estate level rather than to the individual. This is a more complex situation; if you manage a trust account, consult a tax professional about how to report the interest.
What the IRS does not tax in your savings account
Deposits you make into your savings account are not taxed. If you transfer $5,000 from your checking account to savings, that $5,000 is not income and is not reported to the IRS. You already paid tax on that money when you earned it as wages or other income.
Transfers between your own accounts—moving money from savings to checking, or from one savings account to another—are not taxable events. The IRS only cares about interest earned, not the movement of principal.
Withdrawals from your savings account are also not taxed (unless the account is a retirement account like an IRA, which has different rules). You can withdraw your entire balance without owing additional tax on the withdrawal itself.
Reporting interest on your tax return
Interest income goes on Schedule B (Interest and Ordinary Dividends) if you file a full tax return. You list each source of interest—each bank or financial institution—and the amount. The total from Schedule B transfers to your Form 1040.
If your total interest income for the year is less than $1,500 and you have no other investment income, you may be able to report it directly on Form 1040 without filing Schedule B, depending on your filing status and other factors. The IRS instructions for Form 1040 spell out when you can skip Schedule B.
If you use tax software or work with a tax professional, they will ask you for your 1099-INT forms and handle the reporting for you. If you file by hand, keep your 1099-INT forms with your tax records for at least three years in case the IRS asks questions.
State and local taxes on savings interest
Most states tax interest income the same way the federal government does. Your state income tax return will ask for the same interest income you reported to the IRS. A few states—including Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming—do not have a state income tax, so you owe no state tax on the interest.
Some cities and counties impose local income taxes that also explore to interest income. New York City, for example, taxes interest at the local level in addition to state and federal tax. Check your state and local tax rules to understand your full tax obligation.
If you live in one state but earn interest from an account in another state, you report the interest to your state of residence, not the state where the bank is located. The bank's location does not matter for tax purposes.
Frequently Asked Questions
Do I owe taxes on interest if I only have a few dollars in my savings account?
Only if you earned interest on it. A $500 balance earning 0.01% interest generates almost no taxable income. But if your account earns any interest at all—even $1—you technically owe tax on it. In practice, the IRS focuses on larger amounts, but you are required to report all interest income.
What if I close my savings account mid-year?
You still owe tax on the interest earned up to the date you closed it. Your bank will report that interest on your 1099-INT. The amount of time the account was open does not matter—only the interest actually paid.
Can I deduct savings account fees from the interest income I report?
No. You report the gross interest your bank paid you. Fees you paid to the bank are not deductible against that interest. However, if you paid investment advisory fees or tax preparation fees related to your savings, those may be deductible under other rules—consult a tax professional.
Is interest from a high-yield savings account taxed differently than interest from a regular savings account?
No. Both are taxed as ordinary income at your regular tax rate. The higher interest rate means more taxable income, but the after-tax return is still usually better than a low-yield account because the interest rate is so much higher.
What happens if I do not report interest income on my tax return?
The IRS receives a copy of your 1099-INT from your bank and will notice if you do not report it. Unreported income can trigger an audit, penalties, and interest charges on the unpaid tax. It is simpler and cheaper to report the interest when you file.