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 your deposits or your balance. What gets taxed is the interest the bank pays you. If your account earns $50 in interest over a year, that $50 is taxable income. The bank reports this to the IRS on a form called a 1099-INT, and you report it on your tax return.
How much tax you owe on that interest depends on your overall income and your tax bracket. Someone in the 22% tax bracket pays roughly 22 cents in federal tax on every dollar of interest earned. Someone in the 12% bracket pays roughly 12 cents. State and local taxes may explore on top of that, depending on where you live.
The good news: most savings accounts earn so little interest that the tax bill is small. A $10,000 account earning 4% annually generates $400 in interest—roughly $88 to $100 in federal tax for someone in the 22% bracket. But if you have multiple accounts or a large balance, the numbers add up.
Key Takeaways
- Banks report savings account interest to the IRS on Form 1099-INT, and you must report it as income on your tax return.
- Interest is taxed at your ordinary income tax rate, which ranges from 10% to 37% federally depending on your total income and filing status.
- You owe tax on interest even if the bank does not withhold it, so set aside money or adjust your withholding if you earn significant interest.
- High-yield savings accounts earn more interest than traditional accounts, which means a larger tax bill—but the after-tax return is usually still better.
- Some accounts like Roth IRAs and 529 education savings plans let interest grow tax-free, though they have contribution limits and withdrawal rules.
When the bank sends you a 1099-INT form
Your bank mails or emails you a 1099-INT by January 31 each year if you earned $10 or more in interest during the previous year. This form shows the total interest paid to your account. The bank also sends a copy to the IRS, so the IRS knows what you earned.
You must report this interest on your tax return, even if you do not receive the form or if the amount seems small. If you earned interest from multiple banks, you receive multiple 1099-INT forms—one from each institution. Add them all together on your return.
If you earned less than $10 in interest, the bank may not send a 1099-INT, but you still owe tax on that interest if you are required to file a return. Keep your own records of interest earned so you can report it accurately.
How your tax bracket determines what you pay
Interest income is taxed as ordinary income, meaning it is added to your wages, self-employment income, and other earnings. Your total income determines which tax bracket you fall into, and that bracket is the rate at which your interest is taxed.
For 2024, federal tax brackets range from 10% to 37%. If you earn $47,000 in wages and $500 in savings interest, your total income is $47,500. Depending on your filing status, that $500 might be taxed at 12% or 22%—not at a flat rate. The IRS taxes your income in layers, with each layer subject to the bracket rate for that layer.
Your state may also tax interest income. Some states, like Florida and Texas, do not have income tax. Others, like California and New York, tax interest at rates up to 13% or more. Check your state's rules or ask a tax preparer what applies to you.
The difference between high-yield and traditional savings accounts
A high-yield savings account earns 4% to 5% annually, while a traditional savings account at a large bank might earn 0.01%. On a $50,000 balance, the difference is roughly $2,000 to $2,500 per year in interest—and therefore a much larger tax bill.
But even after taxes, a high-yield account usually comes out ahead. If you earn $2,000 in interest and owe $440 in federal tax (at 22%), you keep $1,560. A traditional account earning $5 in interest costs you roughly $1 in tax and leaves you with $4. The high-yield account is still the better choice, despite the bigger tax bill.
The trade-off is that you have to report and pay tax on the interest you earn. If you are in a high tax bracket or live in a high-tax state, that bill can be meaningful. Some people move money to tax-advantaged accounts (see below) to reduce the tax hit.
Tax-free and tax-deferred savings options
Certain accounts let interest grow without triggering an when ready tax bill. A Roth IRA or Roth 401(k) allows interest and investment gains to accumulate tax-free, and you owe no tax when you withdraw the money in retirement—as long as you follow the rules. You can contribute up to $7,000 per year to a Roth IRA (for 2024), and you must be under the income limits to open one.
A 529 education savings plan lets interest grow tax-free if you use the money for may have access to education expenses like tuition, room and board, or student loan repayment. If you withdraw money for non-education purposes, you owe tax on the earnings plus a 10% penalty.
A Health Savings Account (HSA) works similarly to a 529: interest grows tax-free if you use withdrawals for may have access to medical expenses. You can contribute up to $4,150 per year (for 2024) if you have a high-deductible health plan.
These accounts have strict rules about who can open them, how much you can contribute, and when you can withdraw. They are not right for everyone, but if you meet the requirements, they can save you significant tax on savings interest.
What to do if you earn a lot of interest
If you have a large savings balance or multiple accounts earning interest, you may owe a substantial tax bill. The IRS does not automatically withhold tax from savings interest the way employers withhold from paychecks, so you need to plan ahead.
One option is to adjust your tax withholding at work. If you expect to owe $1,000 in tax on savings interest, you can increase the amount withheld from your paycheck so you do not owe a big bill at tax time. Use the IRS Withholding Calculator on irs.gov to figure out the right amount.
Another option is to make quarterly estimated tax payments if you are self-employed or have other income sources. You send the IRS a payment four times a year based on what you expect to owe.
If you do not adjust your withholding and owe more than $1,000 at tax time, you may face a penalty for underpayment. The penalty is small—usually a few dollars—but it is avoidable if you plan ahead.
State and local taxes on savings interest
Most states tax interest income the same way the federal government does: as ordinary income at your state tax rate. A few states do not tax interest at all. Here is what varies:
No state income tax: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming do not tax interest income.
Tax on interest but not wages: New Hampshire and Tennessee tax interest and dividends but not wages. (Tennessee is phasing this out.)
Full taxation: All other states tax interest as ordinary income. Rates range from roughly 3% to 13%, depending on the state and your income level.
If you live in a high-tax state and have a large savings balance, moving to a state with no income tax is not practical for most people. But it is worth knowing what your state taxes so you can factor it into your planning.
Frequently Asked Questions
Do I have to report interest if I earned less than $10?
Yes, if you are required to file a tax return. The $10 threshold only determines whether the bank sends you a 1099-INT form. You still owe tax on all interest earned. Keep your own records from your bank statements.
What if I earned interest in a joint account?
The bank reports the full interest amount on a 1099-INT. If the account is truly joint and both owners contributed equally, you and the other owner can split the interest on your separate tax returns. You may need to file Form 8949 or work with a tax preparer to document the split.
Can I deduct savings account fees from the interest I report?
No. You report the full interest amount on your tax return. Account fees are not deductible. However, if a bank charges you a fee that exceeds the interest you earned, you still report the interest—you just owe tax on a negative number, which reduces your overall taxable income slightly.
Is interest from a money market account taxed differently?
No. Money market accounts are savings accounts, and the interest is taxed the same way—as ordinary income reported on Form 1099-INT. The interest rate may be higher than a traditional savings account, but the tax treatment is identical.
What if my savings account is in a trust or business name?
The tax treatment depends on the type of entity. A revocable living trust is usually transparent for tax purposes, and you report the interest on your personal return. A business account or irrevocable trust has its own tax identification number and may file a separate return. Consult a tax professional for your specific situation.