Your savings account interest is taxable income, but only the interest you earn—not the money you deposit

The money you put into a savings account is yours and does not get taxed. The interest your bank pays you on that money is income, and the IRS treats it the same way it treats wages or other earnings. You owe federal income tax on that interest. Some states also tax it. The amount you owe depends on how much interest you earned and your overall income for the year.

Your bank reports this interest to you and to the IRS on a form called a 1099-INT. You receive it by January 31 each year. The form shows exactly how much interest you earned in the previous year. You then report that amount on your tax return.

The tax you owe on savings interest is calculated at your ordinary income tax rate—the same rate that applies to your salary or other income. If you are in the 22% federal tax bracket, you owe 22% of your interest earnings to federal tax. If you are in the 12% bracket, you owe 12%. State income tax, where it applies, works the same way.

Key Takeaways

  • Interest earned on savings accounts is reported to the IRS on a 1099-INT form and is taxable as ordinary income.
  • You pay tax at your regular income tax rate, not a special rate, so the amount depends on your total income for the year.
  • Banks must send you a 1099-INT by January 31 if you earned $10 or more in interest during the year.
  • Some states tax savings interest and some do not, so your state's rules affect your total tax bill.
  • Interest earned in a traditional IRA or 401(k) is not taxed until you withdraw the money, but interest in a regular savings account is taxed every year.

When your bank reports interest to the IRS

Your bank tracks the interest it pays you throughout the year. By January 31, if you earned $10 or more in interest during the previous year, the bank sends you a 1099-INT form. This form shows the total interest in Box 1. The bank also sends a copy to the IRS.

You do not have to do anything when you receive the 1099-INT. You straightforward use the number from Box 1 when you file your tax return. If you earned interest at more than one bank, you will receive a separate 1099-INT from each one. You add all the interest amounts together on your return.

If you earned less than $10 in interest, your bank may not send you a 1099-INT, but you still owe tax on that interest. You report it on your return based on your own records—your bank statements or the interest column in your account history.

How much tax you actually owe on savings interest

The tax you owe is your interest earnings multiplied by your tax bracket. If you earned $500 in interest and you are in the 22% federal bracket, you owe $110 in federal tax on that interest. If you are in the 12% bracket, you owe $60.

Your tax bracket depends on your total income for the year, not just your savings interest. If you have a job, a business, or other income sources, all of that counts. The more income you have, the higher your bracket, and the more tax you owe on your interest.

State income tax works the same way. In states like California, New York, and Massachusetts, you owe state income tax on savings interest at your state tax rate. In states like Texas, Florida, and Nevada, there is no state income tax, so you owe nothing to the state. Nine states—including South Dakota, Tennessee, and Wyoming—tax interest income but not wages, which is unusual.

The difference between regular savings and tax-advantaged accounts

Interest earned in a regular savings account is taxed every year. Interest earned in a traditional IRA or 401(k) is not taxed until you withdraw the money, sometimes decades later. Interest earned in a Roth IRA is never taxed, even when you withdraw it, as long as you follow the withdrawal rules.

This is why tax-advantaged accounts can grow faster over time. Your interest earns interest on top of interest, without being reduced by taxes each year. In a regular savings account, you pay tax on the interest, so the amount left to earn interest next year is smaller.

High-yield savings accounts earn more interest than regular savings accounts, but that interest is also fully taxable. The higher rate does not change the tax treatment—you still owe income tax on every dollar of interest at your regular rate.

What happens if you do not report savings interest

The IRS receives a copy of your 1099-INT at the same time you do. If you do not report the interest on your tax return, the IRS will notice the discrepancy. The agency matches 1099 forms to tax returns automatically.

If you underreport your income, you may owe back taxes plus interest and penalties. The penalty for not reporting income is usually 20% of the unpaid tax, though it can be higher if the IRS determines the error was intentional. The interest on back taxes compounds daily.

If you earned less than $10 and did not receive a 1099-INT, you still owe tax on that interest. The IRS does not have a copy of it, but you are still required to report it. Failing to do so is underreporting income.

Strategies to reduce tax on savings interest

You cannot avoid the tax, but you can reduce how much interest you earn and therefore how much tax you owe. Moving money from a high-yield savings account to a lower-yield account reduces your interest income. This is rarely worth it—you would be giving up real earnings to avoid taxes you would owe on a smaller amount.

A more practical approach is to use tax-advantaged accounts for the money you do not need to touch for years. If you have an emergency fund in a regular savings account, that is appropriate—you need access to it. If you have money you will not need for retirement, a traditional IRA or 401(k) lets that interest grow tax-deferred.

Some people use a mix: a high-yield savings account for short-term goals and emergency funds, and tax-advantaged accounts for long-term savings. This way you earn good interest on the money you need to keep liquid, and you defer taxes on the money you can lock away.

State-specific rules for savings account taxation

Most states that have income tax treat savings interest the same way the federal government does—as ordinary income taxed at your state rate. A few states have special rules.

Illinois excludes interest and dividend income from state taxation if you are over 65, but not if you are younger. Missouri excludes interest and dividend income entirely, regardless of age. Vermont taxes interest but offers a deduction for a portion of it. These rules change, so check your state's Department of Revenue website for current rules.

If you live in a state with no income tax but earn interest on an account held in another state, you owe tax only to the state where you live. The state where the bank is located does not matter.

Frequently Asked Questions

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

Yes. Your bank does not have to send you a 1099-INT if you earned less than $10, but you still owe tax on that interest. Report it on your tax return based on your bank statements. The IRS does not have a copy, but you are required to report all income.

What if I earned interest at multiple banks?

You will receive a separate 1099-INT from each bank. Add all the interest amounts together and report the total on your tax return. The IRS receives copies from all your banks, so the total they see should match what you report.

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

Yes. Money market accounts are savings accounts, and interest from them is taxed as ordinary income. The interest is reported on a 1099-INT the same way. The higher interest rate does not change the tax treatment.

Can I deduct savings account losses from my taxes?

No. If your account earns interest, you report that as income. If your account earns no interest or very little, you straightforward report what you earned. You cannot deduct losses from a savings account because savings accounts do not typically lose value—they earn interest or sit flat.

Do I owe tax on interest if I move money between my own accounts?

No. Moving money from one of your accounts to another is not income. You only owe tax on interest the bank pays you. Transfers between your own accounts do not trigger any tax.