The IRS wants to know about every dollar of interest your savings account earns

Interest you earn on a savings account is taxed as ordinary income — the same way wages are taxed. Your bank tracks this interest and reports it to the IRS on a form called a 1099-INT. You then report that same amount on your tax return. The tax you owe depends on your total income and your tax bracket, not on how much interest you earned.

This happens automatically. You do not have to do anything to trigger the reporting — your bank sends the 1099-INT to both you and the IRS every January for interest earned the previous year. The amount reported is the gross interest, before any taxes are withheld.

Key Takeaways

  • Banks report savings account interest to the IRS on Form 1099-INT, which arrives by January 31 each year.
  • Interest is taxed as ordinary income at your marginal tax rate, not at a flat rate.
  • You must report this interest on your tax return even if you do not receive a 1099-INT, if the interest was actually earned.
  • High-yield savings accounts earn more interest, which means you owe more tax on that interest — but the account is still worth using if the rate is high enough.
  • Some accounts like Roth IRAs and certain 529 plans let interest grow tax-free, but regular savings accounts do not.

When your bank sends the 1099-INT form

Your bank mails or emails the 1099-INT by January 31 of the year after you earned the interest. If you earned $10 in interest during 2024, you will receive the 1099-INT in January 2025. The form shows the account number, the amount of interest, and the bank's name and tax ID number.

You will receive a 1099-INT only if you earned at least $10 in interest during the year. If you earned less than $10, the bank does not have to send one — but you still owe tax on whatever interest you did earn, and you still have to report it on your return.

The IRS receives a copy of every 1099-INT at the same time. This is how the IRS knows what interest income you should be reporting. If your tax return does not match the 1099-INT the IRS received, you may be contacted.

How interest income affects your tax bracket

Interest is added to your other income — wages, self-employment income, investment gains — to calculate your total taxable income for the year. Your tax bracket is based on that total. If you earn $50,000 in wages and $500 in interest, your taxable income is $50,500, and you pay tax on all of it at the rate that applies to that income level.

The tax rate you pay on interest is the same as the rate you pay on your wages. If you are in the 22% tax bracket, you pay 22% on the interest. If you are in the 12% bracket, you pay 12%. The interest does not get a special rate — it is treated like any other income.

This matters because earning more interest can push you into a higher tax bracket. If you are near the edge of a bracket, a high-yield savings account earning significantly more interest might move you up. For most people this is still worth it — earning more interest and paying more tax is better than earning less interest and paying less tax — but it is worth knowing the effect.

The difference between high-yield and regular savings accounts

A regular savings account at a traditional bank might earn 0.01% annual interest. A high-yield savings account might earn 4% or 5%. On $10,000, that is the difference between $1 in interest and $400 to $500 in interest. You owe tax on whichever amount you actually earn.

The tax treatment is identical — both are reported on a 1099-INT and both are taxed as ordinary income. The only difference is how much interest you earn, and therefore how much tax you owe. A high-yield account means more interest, which means more tax, but also more money in your account. The higher interest rate is usually worth the extra tax.

Tax-advantaged accounts where interest grows tax-free

Some accounts let interest grow without being taxed each year. A Roth IRA is one example — interest and investment gains inside a Roth IRA are never taxed, as long as you follow the withdrawal rules. A 529 education savings plan also allows tax-free growth if the money is used for education expenses. A Health Savings Account (HSA) grows tax-free if used for may have access to medical expenses.

These accounts exist specifically because the tax-free growth makes them more powerful for long-term saving. If you have money you are saving for retirement, education, or medical costs, putting it in one of these accounts instead of a regular savings account can make a real difference over time. But they have rules about when you can withdraw the money and what you can use it for.

A regular savings account has no such restrictions — you can withdraw whenever you want — but you pay tax on the interest every year. The choice depends on what you are saving for and when you will need the money.

What happens if you do not receive a 1099-INT

If you earned interest but did not receive a 1099-INT, you still have to report it on your tax return. This can happen if you earned less than $10 (the reporting threshold), if the bank made a mistake, or if you moved and the form went to an old address.

Check your account statements from the previous year. Your bank statement shows exactly how much interest you earned, even if no 1099-INT was sent. Add that amount to your tax return under interest income. If the IRS later receives a corrected 1099-INT from the bank, you can file an amended return, but it is better to report the correct amount the first time.

State and local taxes on savings interest

In addition to federal income tax, some states and cities tax interest income. The amount varies by location. Some states do not tax interest at all. Others tax it the same way the federal government does — as ordinary income at your state tax rate.

Your state tax return will ask about interest income, and you will report the same amount you reported to the IRS. The 1099-INT you receive from your bank is used for both federal and state reporting. If you live in a state with no income tax, you do not owe state tax on the interest, but you still owe federal tax.

Frequently Asked Questions

Do I have to pay tax on interest if I do not withdraw it from the account?

Yes. You owe tax on interest the year it is earned, whether you withdraw it or leave it in the account. The IRS taxes interest when it is credited to your account, not when you spend it. If you leave the interest in the account, it earns interest the next year, and you owe tax on that too.

What if I earned interest in multiple savings accounts?

You report all of it. If you have three savings accounts at different banks, each bank sends a separate 1099-INT. You add all the interest amounts together and report the total on your tax return. The IRS receives all three 1099-INTs and expects your return to match the combined total.

Can I deduct savings account interest as a loss?

No. Interest income cannot be deducted. You report it as income, and that is the end of it. There is no deduction for having a savings account or for the interest it earns.

Does a joint savings account change how interest is taxed?

If you own a joint account, the interest is typically split between the owners based on each person's contribution. Your bank may issue separate 1099-INTs to each owner, or one 1099-INT to the primary account holder. Check with your bank about how they report joint account interest, and make sure your tax return matches what the IRS receives.