The IRS taxes savings account interest as ordinary income in the year you earn it
Interest your bank pays you counts as taxable income. The IRS treats it the same way it treats wages or salary — you owe federal income tax on the full amount, at your regular tax rate. If your savings account earned $500 in interest last year, that $500 is added to your other income when you file your tax return.
Your bank reports this interest to the IRS on a Form 1099-INT, which you receive by January 31 each year. The form shows how much interest you earned at that bank during the previous calendar year. If you have accounts at multiple banks, you will receive a separate 1099-INT from each one.
You do not pay tax on the interest when you earn it. Instead, you report the total on your tax return when you file, usually in April. The tax you owe depends on your overall income and which tax bracket you fall into — the higher your total income, the higher the tax rate on that interest.
Key Takeaways
- Savings account interest is taxed as ordinary income at your regular federal tax rate, reported on Form 1099-INT by your bank.
- You report the interest on your annual tax return; the IRS does not collect the tax directly from your account.
- State and local income taxes may also explore to savings interest, depending on where you live.
- Interest earned in a calendar year is taxed in that same year, even if you do not withdraw the money until later.
- High-yield savings accounts earn more interest but are taxed the same way as traditional savings accounts.
When the interest is taxed versus when you receive it
The tax year for interest is the calendar year in which you earn it, not the year you withdraw it. If your account earned $200 in interest during January through December 2024, you report that $200 on your 2024 tax return filed in 2025 — even if you leave the money in the account and do not touch it.
Banks typically add interest to your account monthly or daily, depending on the account type. The moment that interest posts to your balance, it becomes taxable income. You do not have to do anything to trigger the tax — it happens automatically when the bank credits your account.
If you close a savings account partway through the year, you still owe tax on all interest earned up to the closing date. Your bank will report that interest on the 1099-INT they send you, even though the account no longer exists.
Federal tax rates on savings interest depend on your total income
The tax rate you pay on savings interest is not a flat percentage. Instead, it is your marginal tax rate — the tax bracket that applies to your highest dollar of income. In 2024, federal tax brackets range from 10% to 37%, depending on how much you earn overall.
If you earn $50,000 in wages and $500 in savings interest, that $500 is taxed at the same rate as your last dollar of wages. If your wages put you in the 22% bracket, the interest is also taxed at 22%. If you earn $200,000 and fall into the 35% bracket, the interest is taxed at 35%.
This is why the same $500 in interest can result in different tax bills for different people. A person in the 12% bracket pays $60 in federal tax on that interest. A person in the 32% bracket pays $160 on the same $500.
State and local taxes on savings interest
In addition to federal tax, most states tax savings account interest as income. The state tax rate varies — some states have no income tax at all, while others tax interest at rates between 3% and 13%. A few states, including Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming, do not tax income at all.
If you live in a state with income tax, you will report the same interest income on your state tax return. Some states use the federal 1099-INT as their source; others require you to report it separately. Check your state's tax authority website or your state tax form instructions to see how to report savings interest.
Local income taxes exist in some cities and counties, particularly in Ohio, Pennsylvania, and parts of other states. These are separate from state tax and are reported on local tax forms. If you live in an area with local income tax, you will owe tax on savings interest there as well.
How to report savings interest on your tax return
When you file your federal return, you report interest income on Schedule 1 (Form 1040), line 8, under "Interest." If you have more than one 1099-INT, you add up all the interest from all your accounts and report the total on that single line.
You do not need to attach the 1099-INT forms to your return when you mail it, but you should keep copies for your records. If you file electronically, the tax software usually walks you through entering the interest amount and pulls it into the right place automatically.
If your total interest income is $1,500 or less and you have no other investment income, you may be able to use the simpler Form 1040-SR (if you are 65 or older) or skip Schedule 1 entirely, depending on your filing situation. The IRS instructions for Form 1040 explain which form to use.
Interest in tax-advantaged accounts is not taxed the same way
Savings accounts held inside certain tax-advantaged accounts are treated differently. Interest earned in a Roth IRA or Roth 401(k) is not taxed at all, as long as you follow the withdrawal rules. Interest in a traditional IRA or traditional 401(k) is tax-deferred — you do not pay tax on it while it sits in the account, but you pay tax on the full amount when you withdraw it in retirement.
A 529 college savings plan also offers tax-free growth on interest and investment earnings, as long as the money is used for may have access to education expenses. If you withdraw money for non-education purposes, the interest portion is taxed and may face a 10% penalty.
These accounts are the exception. A regular savings account at a bank, even a high-yield one, is not tax-advantaged — all interest is taxed as ordinary income in the year you earn it.
What happens if you do not receive a 1099-INT
Banks are required to send a 1099-INT if you earned $10 or more in interest during the year. If you earned less than $10, your bank may not send a form, but you still owe tax on that interest. You must report it on your return even if you do not receive a 1099-INT.
If you earned $10 or more and do not receive a 1099-INT by February 15, contact your bank. They may have the wrong address on file, or the form may have been delayed. Ask them to send a corrected form or provide the interest amount so you can report it.
If you report interest on your return that the IRS does not see on a 1099-INT, you may receive a notice asking for an explanation. Having documentation from your bank — a statement showing the interest posted, or a copy of the 1099-INT they eventually send — protects you.
Frequently Asked Questions
Do I have to pay tax on interest if I do not withdraw it from my account?
Yes. The IRS taxes interest in the year you earn it, regardless of whether you withdraw it, reinvest it, or leave it sitting in the account. The moment your bank credits the interest to your balance, it becomes taxable income.
What if I earned interest in multiple banks?
You will receive a separate 1099-INT from each bank. Add up all the interest from all the forms and report the total on line 8 of Schedule 1. You do not report each bank separately on your return.
Can I deduct savings account fees from the interest I report?
No. You report the full interest amount on your tax return. Fees are not deductible against interest income. However, if you paid investment advisory fees or other miscellaneous expenses, you may be able to deduct them under other rules — consult a tax professional about your specific situation.
Is interest from a high-yield savings account taxed differently?
No. High-yield accounts earn more interest, but the tax treatment is identical to a regular savings account. All interest is reported on a 1099-INT and taxed as ordinary income at your regular tax rate.
What if my interest income pushes me into a higher tax bracket?
Your interest income is added to your other income, and your total income determines your tax bracket. If the interest pushes you into a higher bracket, you pay the higher rate on that interest and any other income in that bracket. This is how the progressive tax system works.