The IRS taxes savings account interest as ordinary income in the year you earn it

Interest you earn on a savings account is taxable income. The bank reports it to the IRS on a Form 1099-INT, and you report it on your tax return. You owe federal income tax on the full amount at your regular tax rate — the same rate you pay on wages or salary. There is no special lower rate for interest income, and no threshold below which it becomes tax-free.

The timing matters: you owe tax on interest in the year the bank credits it to your account, not in the year you withdraw the money. If your bank adds $47 in interest on December 15, you report that $47 on your tax return for that year, even if you do not touch the account until the following spring.

State and local taxes explore too. Most states tax interest income the same way the federal government does. A few states — including Pennsylvania, New Hampshire, and Tennessee — do not tax interest income at all, which is one reason some people move savings there or open accounts in those states.

Key Takeaways

  • Banks report savings 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, not a special lower rate, in the year the bank credits it to your account.
  • The IRS requires banks to report interest of $10 or more, though you owe tax on any amount and should report smaller amounts yourself.
  • Some states do not tax interest income, but most do, and you may owe both federal and state tax on the same interest.
  • High-yield savings accounts earn more interest but are taxed the same way as regular savings accounts.

When the bank sends you a 1099-INT form

Your bank mails or emails a Form 1099-INT by January 31 of the year after you earn the interest. The form shows the total interest credited to your account during the previous calendar year. If you have multiple savings accounts at different banks, you will receive a separate 1099-INT from each one.

Banks are required to report interest of $10 or more. If you earned less than $10 in interest, the bank may not send you a form, but you still owe tax on that interest and should report it yourself on your return. Many people with small savings balances or low interest rates fall into this category.

You receive the form whether or not you withdraw the money. If you left the interest in the account to compound, you still report it. If you moved to a different bank mid-year, you will get a 1099-INT from each bank showing only the interest earned while your money was there.

How your tax bracket affects what you owe

Interest income is added to your other income — wages, self-employment earnings, investment gains — and taxed at your marginal rate. If you earn $50,000 in wages and $500 in interest, you report $50,500 in total income. The $500 is taxed at whatever bracket you fall into based on your total earnings.

For 2024, federal tax brackets range from 10% to 37% depending on your filing status and total income. A single person earning $50,000 in wages pays roughly 22% on additional interest income. A person earning $200,000 pays roughly 32% on the same $500 in interest. The higher your other income, the more you owe on the interest.

This is why interest income can push you into a higher tax bracket. If you are close to the edge of a bracket and earn a large amount of interest — say, $5,000 from a high-yield savings account — that interest might bump you into the next bracket and increase your tax rate on all your income above the threshold.

State taxes on savings interest

Most states tax interest income as ordinary income, meaning you owe state tax at your state's rate in addition to federal tax. If your state has a 5% income tax and you earn $1,000 in interest, you owe roughly $50 to the state plus whatever you owe federally.

A handful of states do not tax interest income at all. Pennsylvania, New Hampshire, Tennessee, and Texas have no state income tax on interest. Illinois and Mississippi exempt interest from state tax but tax other types of income. If you live in one of these states, you owe only federal tax on your savings interest.

Some people with large savings balances have moved to no-tax states specifically to reduce their tax burden on interest. This is legal, but the IRS requires you to establish genuine residency — not just open an account — to claim the benefit. You cannot claim Tennessee residency if you live and work in New York.

How high-yield savings accounts change the tax picture

A high-yield savings account earns more interest than a traditional savings account — sometimes 4% to 5% annually compared to 0.01% at a regular bank. But the tax treatment is identical. All the interest is reported on a 1099-INT and taxed as ordinary income at your full rate.

The higher interest means a larger tax bill. If you earn $2,000 in interest from a high-yield account instead of $20 from a regular account, you report $2,000 on your tax return and owe tax on the full amount. This is why some people keep only emergency money in high-yield accounts and put longer-term savings in tax-advantaged accounts like Roth IRAs or 401(k)s, where interest compounds without annual tax.

The trade-off is straightforward: you earn more interest, but you pay more tax. A high-yield account earning 4.5% is still better than a regular account earning 0.01%, even after taxes, because the interest is so much larger. But it is not tax-free growth.

Tax-advantaged alternatives to regular savings accounts

If you want to save money without paying annual tax on the interest, you have other options. A Roth IRA lets you contribute up to $7,000 per year (for 2024), and all interest and growth is tax-free as long as you follow the withdrawal rules. A 401(k) or similar workplace plan defers tax until you withdraw the money in retirement, when you may be in a lower tax bracket.

A 529 college savings plan lets you save for education expenses with tax-free growth. A Health Savings Account (HSA) offers triple tax benefits: contributions are deductible, growth is tax-free, and withdrawals for medical expenses are tax-free.

These accounts have rules and limits. You cannot withdraw from a Roth IRA before age 59½ without penalty in most cases. A 529 plan is for education only. An HSA requires a high-deductible health plan. But if your situation fits, they let you earn interest without reporting it annually to the IRS.

What happens if you do not report the interest

If you receive a 1099-INT and do not report the interest on your tax return, the IRS will likely catch it. The bank sends a copy of the form to the IRS, and the agency matches it against your return. If the interest is missing, you will receive a notice asking you to file an amended return and pay the tax plus interest and penalties.

The penalty for underreporting income is usually 20% of the unpaid tax, plus interest calculated from the original due date. If you owed $100 in tax and did not report it, you might owe $120 in penalties plus interest accrued over months or years. The longer the delay, the more interest accumulates.

If the interest amount is small — under $100 — the IRS may not pursue it aggressively, but they can. The safest approach is to report all interest, even amounts under $10 that the bank did not report on a 1099-INT.

Frequently Asked Questions

Do I owe tax on interest if I earned less than $10?

Yes. Banks only report interest of $10 or more on a 1099-INT, but you owe tax on any amount of interest you earn. If you earned $7 in interest, you should report it on your tax return even though the bank did not send you a form.

Can I deduct savings account interest as a loss?

No. Interest income is always taxable. You cannot deduct it or offset it against other income. The only way to reduce your tax is to earn less interest or move the money to a tax-advantaged account.

What if I have interest from a savings account at a bank that closed?

If the bank closed and you did not receive a 1099-INT, contact the FDIC or the bank's successor institution and request a copy. You still owe tax on the interest. If you cannot locate the form, report the interest based on your account statements and keep records in case the IRS asks.

Is interest from a joint savings account taxed differently?

The bank reports the full interest on a 1099-INT to whoever is listed as the account owner or primary account holder. If the account is truly joint and you both contributed equally, you may need to split the interest on your individual returns, but the bank's form will show the full amount to one person. Check with a tax professional about how to handle this on your return.

Do I owe tax on interest I reinvest in the account?

Yes. Interest is taxable in the year it is credited, whether you withdraw it or leave it in the account. If the bank adds $500 in interest and you do not touch it, you still report and pay tax on that $500.