The IRS taxes savings account interest as ordinary income

Interest you earn in a savings account is taxed by the federal government as ordinary income — the same way wages are taxed. If your savings account earns $50 in interest over a year, that $50 counts as income you owe tax on. The bank does not take the tax out automatically; instead, you report it when you file your tax return.

The tax rate you pay depends on your total income and your tax bracket. Someone in the 12% tax bracket pays roughly 12 cents in federal tax for every dollar of interest earned. Someone in the 22% bracket pays roughly 22 cents per dollar. Your state may also tax this interest, depending on where you live.

This is different from how some other investments work. For example, long-term capital gains (profit from selling stocks you held over a year) are often taxed at lower rates. Savings account interest gets no such break — it is treated as regular income from day one.

Key Takeaways

  • Savings account interest is reported to the IRS on a Form 1099-INT, which the bank sends you and the government each January.
  • You report this interest on your tax return even if the bank did not withhold any tax, and you owe federal tax on it at your ordinary income tax rate.
  • Most states also tax savings account interest as income, though a few states do not tax any interest income.
  • If you earn less than $10 in interest in a year, the bank may not send you a Form 1099-INT, but you still owe tax on that interest if you file a return.

How the IRS finds out about your interest earnings

Banks report interest to the IRS using a form called the Form 1099-INT. In January of each year, your bank sends you a copy of this form showing how much interest you earned the previous year. The bank also sends a copy directly to the IRS, so the government knows what you earned.

This is why you cannot straightforward ignore small amounts of interest. Even if you earn only $15 in interest and think it is not worth reporting, the IRS already has a record of it. When you file your tax return, the IRS matches what you report against what the bank reported. If the numbers do not match, you may receive a notice.

The threshold for the bank to send you a Form 1099-INT varies slightly by bank and account type, but generally the bank must report interest of $10 or more. However, you still owe tax on interest below $10 if you file a return — the form just may not be issued.

Your tax bracket determines how much you actually owe

The amount of tax you pay on savings interest depends on your tax bracket, which is determined by your total income for the year. Tax brackets change each year and are different depending on whether you file as single, married filing jointly, head of household, or another status.

For example, in 2024, a single person with taxable income between roughly $11,600 and $47,150 is in the 12% bracket. That person pays 12% federal tax on their savings interest. A single person with income above roughly $191,950 is in the 37% bracket and pays 37% federal tax on savings interest. The more income you have from all sources, the higher your bracket and the more tax you owe on interest.

You do not need to calculate this yourself. When you file your tax return using tax software or a tax preparer, the software or preparer figures out your bracket and calculates the tax owed on your interest automatically.

State income tax on savings interest

Most states tax savings account interest as income, using rates that range from roughly 1% to 13% depending on the state. A few states — including Florida, Texas, Wyoming, and South Dakota — do not have a state income tax at all, so residents owe no state tax on savings interest. New Hampshire and Tennessee tax only interest and dividend income, not wages.

If you live in a state with income tax, you will report your savings interest on your state tax return as well as your federal return. The state uses its own tax brackets and rates, separate from the federal ones. Your total tax bill on savings interest is the federal tax plus the state tax (if your state has one).

If you moved during the year or work in a different state than you live in, the rules become more complex. Most states tax you based on where you live, not where you work, but some states have reciprocal agreements. A tax preparer can help you sort this out if your situation is complicated.

When high interest rates mean higher taxes

In recent years, some savings accounts have offered higher interest rates than they did in the past — sometimes 4% to 5% annually. This is good news for your savings, but it also means more interest income to report and more tax to owe.

For example, if you have $10,000 in a savings account earning 4.5% interest, you earn $450 in interest over a year. At a 22% federal tax bracket, you owe roughly $99 in federal tax on that interest. If you also live in a state with a 5% income tax, you owe roughly another $22.50 in state tax. Your actual gain is $450 minus roughly $121.50 in taxes, or about $328.50.

This does not mean you should avoid high-yield savings accounts. The interest you earn is still yours to keep after taxes. But it is worth understanding that the interest is taxable income, and planning accordingly when you file your return.

How to report savings interest on your tax return

When you file your federal tax return, you report savings interest on Schedule B (Interest and Ordinary Dividends), which attaches to Form 1040. You list each account that earned interest and the amount from the Form 1099-INT the bank sent you. If you have multiple savings accounts, you add up all the interest and report the total.

If your total interest for the year is less than $1,500 and you have no other investment income, you may be able to report the interest directly on Form 1040 without using Schedule B — the instructions on the form will tell you. Most people use tax software like TurboTax, H&R Block, or TaxAct, which walks you through entering this information step by step.

For your state return, you typically report the same interest income on your state tax form. The exact form varies by state, but the process is similar: you enter the interest amount from your Form 1099-INT, and the state calculates the tax owed.

Frequently Asked Questions

Do I have to pay taxes on interest if I do not file a tax return?

If you are required to file a tax return based on your income, yes — you owe tax on savings interest whether you file or not. The IRS has a record of the interest from the Form 1099-INT the bank sent. If you do not file and the IRS notices, you may face penalties and interest charges on the unpaid tax.

What if I earned interest in a joint savings account?

The bank reports the full interest amount on a Form 1099-INT. If the account is truly joint and both owners contributed equally, you and the other owner should each report half the interest on your own tax returns. Keep documentation showing how you split the interest in case the IRS asks.

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

No. You report the full interest amount the bank paid you. Fees you paid to the bank are not deductible against this interest income for most people. However, if you are self-employed or have investment income, you may be able to deduct certain investment-related fees — a tax preparer can advise you on your specific situation.

Is interest from a money market account taxed the same way?

Yes. Money market accounts, certificates of deposit (CDs), and other savings products all report interest on Form 1099-INT and are taxed as ordinary income at your tax bracket rate, just like a regular savings account.

What if the bank made a mistake on my Form 1099-INT?

Contact the bank and ask them to issue a corrected Form 1099-INT (marked as a correction). The bank will send the corrected form to you and the IRS. Once you receive it, file an amended tax return if you already filed, reporting the correct interest amount.