The IRS counts savings account interest as income, and you owe tax on it
When your bank pays you interest on a savings account, that money is taxable income — the same way wages are. The IRS treats it as money you earned, even though you didn't work for it. You report it on your tax return each year, and you may owe federal income tax on it, state income tax on it, or both, depending on where you live and how much interest you earned.
The amount of tax you actually pay depends on two things: how much interest you earned that year, and your tax bracket (the percentage rate the IRS applies to your income). A person earning $25,000 a year pays tax on savings interest at a different rate than someone earning $100,000. The bank does not withhold tax automatically — you handle it when you file your return, or you may need to make quarterly estimated tax payments if the interest is large enough.
Key Takeaways
- Your bank will send you a Form 1099-INT each January showing how much interest you earned the previous year, and you must report that amount on your tax return.
- You owe federal income tax on savings interest at your regular tax bracket rate, plus state income tax in most states.
- If you earned less than $10 in interest during the year, the bank may not send a 1099-INT, but you still owe tax on it if you file a return.
- High-yield savings accounts pay more interest than traditional savings accounts, which means more taxable income — but the after-tax return is usually still better.
How the IRS finds out about your interest income
Your bank tracks every dollar of interest it pays you during the calendar year (January through December). In January of the following year, the bank sends you a Form 1099-INT — a tax document that lists the total interest paid to you. The bank also sends a copy to the IRS, so the IRS knows how much you earned.
When you file your federal tax return, you report the interest amount from the 1099-INT on your return. The IRS then checks whether the number matches what the bank reported. If you don't report it and the IRS sees the bank's copy, you will owe back taxes plus penalties.
Some banks do not send a 1099-INT if you earned less than $10 in interest that year. However, you still owe tax on that interest if you file a return — you just have to calculate and report it yourself.
What tax rate applies to your interest income
Savings account interest is taxed as ordinary income, meaning it uses your regular income tax bracket. If you are in the 22% federal tax bracket, you pay 22% federal tax on the interest. If you are in the 12% bracket, you pay 12%. The rate depends on your total income for the year, not just the interest.
This is different from long-term capital gains (profit from selling stocks you held over a year), which have their own lower tax rates. Interest gets no special treatment — it is taxed the same way as a paycheck.
On top of federal tax, most states also tax savings interest as income. A few states (Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming) do not have a state income tax at all. The rest tax interest at their state income tax rate, which varies from roughly 1% to 13% depending on the state and your income level.
When you might owe quarterly estimated taxes
If you earn a large amount of interest — usually $1,000 or more in a year — and you do not have an employer withholding taxes from a paycheck, you may need to make quarterly estimated tax payments to the IRS. This happens because the IRS expects you to pay taxes throughout the year, not all at once when you file your return in April.
You calculate your estimated tax based on how much interest you expect to earn, then send payments to the IRS in April, June, September, and January. If you do not make these payments and you owe a large amount at tax time, you may face a penalty for underpayment.
Most people with ordinary savings accounts will not earn enough interest to trigger this rule. But if you have a very large balance in a high-yield savings account, or you have multiple accounts, it is worth checking the IRS instructions or talking to a tax professional.
How high-yield savings accounts change the tax picture
A high-yield savings account pays significantly more interest than a traditional savings account — sometimes 4% or 5% annually, compared to 0.01% at many big banks. This means more interest income, and therefore more tax owed on that income.
However, even after paying tax on the higher interest, you usually come out ahead. If you earn $500 in interest at 5% and owe 22% federal tax plus your state tax (let's say 5%), you pay roughly $135 in tax and keep $365. At a traditional account paying 0.01%, you might earn $2 in interest and owe almost nothing in tax. The high-yield account is still the better choice for your money, even accounting for the extra tax.
The key is to understand that the tax is on the interest earned, not on your account balance itself. You do not pay tax on the principal — only on what the bank paid you.
Reporting interest on your tax return
When you file your federal return, you report the interest income on Schedule 1 (Form 1040), which is where you list all income sources outside of wages. You enter the total from your 1099-INT form in the line for interest income. If you have interest from multiple accounts, you add them all together and report the total.
For state taxes, the process varies by state. Most states have a similar line on their income tax return where you report interest. Some states follow federal rules closely; others have slightly different thresholds or rules. Your state tax return instructions will tell you where to report it.
If you use tax software (like TurboTax or TaxAct), you enter the 1099-INT information when prompted, and the software automatically puts it in the right place on your return and calculates the tax owed.
Interest from joint accounts and accounts for children
If you own a savings account jointly with another person, the interest is split between you based on who owns what percentage of the account. The bank may send each owner a separate 1099-INT showing their share, or it may send one form to the primary account holder. Either way, each owner reports their share on their own tax return.
If you open a savings account for a child, the interest is the child's income, not yours. The child must report it on their own tax return if they file one. However, if the child's total income (including interest) is below a certain threshold, they may not have to file. The threshold changes each year, so check the IRS website or ask a tax professional if you are unsure.
Frequently Asked Questions
Do I have to report interest if I only earned a few dollars?
If you earned less than $10, the bank may not send a 1099-INT. However, you still owe tax on it if you file a return. If you earned very little interest and your total income is below the filing threshold for your situation, you may not have to file a return at all — but that depends on your age, filing status, and other income.
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 for most people. However, if you have investment accounts and pay fees to a professional investment advisor, those may be deductible under certain circumstances — ask a tax professional.
What if I closed my account mid-year — do I still owe tax on the interest earned before I closed it?
Yes. You owe tax on all interest earned during the calendar year, regardless of when you close the account. The 1099-INT will show the total interest for the full year, and you report it all on that year's tax return.
Is interest from a money market account taxed the same way as a savings account?
Yes. Money market accounts are treated the same as savings accounts for tax purposes. The interest is ordinary income, reported on a 1099-INT, and taxed at your regular income tax rate.
Do I owe tax on interest if I have a Roth IRA or other retirement account?
No. Interest earned inside a Roth IRA, traditional IRA, 401(k), or other retirement account is not taxed in the year it is earned. That is one of the main benefits of these accounts. You only pay tax when you withdraw the money in retirement (or in some cases, never, depending on the account type).