Interest income is taxed as ordinary income at your federal tax rate, and your bank reports it to the IRS on Form 1099-INT

The interest your savings account earns 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 whatever tax bracket you fall into. Your bank tracks this interest and sends both you and the IRS a record each January, which means the IRS already knows what you earned before you file your return.

The tax is due in the year you earn the interest, not when you withdraw the money. If your account earned $50 in interest during 2024, that $50 is taxable income for the 2024 tax year, even if you leave the money in the account and never touch it.

Some states and cities also tax savings account interest as part of state or local income tax. Whether you owe depends on where you live and where the bank is located — most states tax interest earned by residents regardless of the bank's location.

Key Takeaways

  • Your bank reports all interest earned to the IRS on Form 1099-INT, which arrives by January 31 each year.
  • Interest is taxed at your ordinary income tax rate — the same rate as your salary or wages — not at a special lower rate.
  • You owe tax on interest in the year you earn it, even if you never withdraw the money from the account.
  • Many states and some cities tax savings account interest as part of state or local income tax in addition to federal tax.
  • If you earned less than $10 in interest during the year, your bank may not send a Form 1099-INT, but the interest is still taxable.

When your bank sends the IRS a record of your interest

Your bank is required to report interest earnings to the IRS using Form 1099-INT. This form lists the account holder's name, Social Security number, and the total interest earned during the calendar year. The bank sends a copy to you and a copy to the IRS.

The important date for banks to send Form 1099-INT is January 31 of the following year. So interest you earned in 2024 appears on a form you receive by January 31, 2025. This timing matters because you need the form to complete your tax return accurately.

If you earned less than $10 in interest during the year, your bank may not be required to send a Form 1099-INT. However, the interest is still taxable income — you still owe tax on it even without the form. If you don't receive a 1099-INT but know you earned interest, you can report it yourself on your tax return.

How to report interest income on your tax return

Interest income goes on Schedule B (Interest and Ordinary Dividends) if you earned more than $1,500 in interest and dividends combined during the year. If you earned $1,500 or less, you can report the interest directly on Form 1040 without filing Schedule B.

You enter the total interest from all your savings accounts, money market accounts, and certificates of deposit in one place. If you have multiple accounts, you add them together. The IRS does not care how many accounts you have — it cares about the total.

Keep your Form 1099-INT with your tax records. The IRS matches the 1099-INT the bank sent them against what you report on your return. If the numbers do not match, the IRS will send you a notice asking for an explanation.

Interest earned in the year you open or close an account

If you open a savings account partway through the year, you only pay tax on the interest earned from the opening date forward. If you close an account partway through the year, you only pay tax on interest earned up to the closing date. The bank calculates this on your 1099-INT automatically.

If you close an account and the bank has not yet sent you a 1099-INT, ask the bank for a statement showing the interest earned through your closing date. You will need this to report the income accurately on your tax return.

State and local taxes on savings account interest

Most states tax interest income as part of state income tax. The rate varies by state — some states have no income tax at all, while others tax interest at the same rate as wages. A few states tax interest at a lower rate than other income, but this is uncommon.

Some cities and counties also impose local income tax on interest. New York City, for example, taxes interest as part of city income tax. Whether you owe local tax depends on where you live and work, not where your bank is located.

If you live in a state with no income tax — such as Florida, Texas, or Wyoming — you owe no state tax on savings account interest. You still owe federal tax. If you live in a state that taxes interest, you report it on your state income tax return using the same 1099-INT your bank sent you.

What happens if you do not report interest income

The IRS receives a copy of every Form 1099-INT your bank sends. If you do not report the interest on your tax return, the IRS will notice the discrepancy. The agency has automated systems that match 1099-INT forms against filed returns.

If you underreport interest income, you may owe back taxes plus interest on the unpaid amount. The IRS charges interest on late payments — the rate changes quarterly but is typically between 8 and 10 percent per year. You may also face a penalty for underpayment, which is usually 20 percent of the unpaid tax.

If the underreporting appears intentional rather than accidental, the IRS can assess a fraud penalty of 75 percent of the unpaid tax. The difference between negligence and fraud is intent — if you straightforward made a mistake, you face the lower penalty.

High-yield savings accounts and interest tax

High-yield savings accounts earn more interest than traditional savings accounts, which means you owe more tax on the earnings. The tax treatment is identical — interest is still reported on Form 1099-INT and taxed as ordinary income — but the dollar amount of tax is higher because the interest is higher.

If a high-yield account earns 4.5 percent annual interest and you have $10,000 in the account, you earn $450 in interest that year. That $450 is fully taxable at your ordinary income tax rate. If you are in the 24 percent federal tax bracket, you owe $108 in federal tax on that interest alone.

Some people move money to high-yield accounts specifically to earn more interest, but they sometimes forget to account for the tax impact. The after-tax return on a high-yield account is lower than the advertised rate because you have to pay tax on the earnings.

Frequently Asked Questions

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

Yes. Even if your bank does not send a Form 1099-INT because you earned less than $10, the interest is still taxable income. You should report it on your tax return. The IRS does not have a minimum threshold for taxable interest — any amount is taxable.

Can I deduct savings account fees from the interest I report?

No. You report the full interest amount on your tax return. Savings account fees are not deductible against interest income. However, if you paid investment advisory fees or fees to a tax professional to help with investment decisions, those may be deductible in limited circumstances — consult a tax professional about your specific situation.

What if I have savings accounts at multiple banks?

You add up all the interest from all your accounts and report the total on your tax return. Each bank sends its own Form 1099-INT, but you combine them into one number when you file. The IRS receives all the 1099-INTs and matches them against your return.

Is interest from a joint savings account split between owners for tax purposes?

Not automatically. The bank reports the full interest amount on a 1099-INT in the name of the person whose Social Security number is listed as the primary account holder. If the account is truly joint and the interest should be split, you and the other owner need to report your actual share on your respective tax returns and keep documentation of the split in case the IRS asks.

Do I owe tax on interest I did not withdraw?

Yes. You owe tax on interest in the year you earn it, regardless of whether you withdraw it, reinvest it, or leave it in the account. The IRS taxes interest when it is credited to your account, not when you spend or move the money.