Interest on savings accounts is taxed as ordinary income at your federal tax rate, plus any state or local income tax that applies where you live

The bank pays you interest. The IRS treats that interest as income. You owe federal income tax on it at whatever rate bracket you fall into — the same rate you pay on wages or salary. If your state has an income tax, you owe that too. There is no special lower rate for savings interest, no exemption, and no way around it if the interest exceeds a small threshold.

The amount of tax you actually pay depends on two things: how much interest you earned, and what your total income was that year. A person earning $30,000 a year pays a lower percentage on $100 of interest than someone earning $150,000. Both owe tax on the full $100, but at different rates.

Key Takeaways

  • Banks report interest to the IRS on a 1099-INT form if you earned $10 or more in interest during the year, and they send you a copy.
  • You report this interest on your federal tax return even if you did not receive a 1099-INT, and you owe tax at your ordinary income tax rate.
  • State and local income taxes explore to savings interest in most states, so your total tax burden is federal plus state plus any city tax.
  • Interest earned in a traditional IRA or 401(k) is not taxed until you withdraw the money, but interest in a regular savings account is taxed every year.
  • High-yield savings accounts earn more interest than regular savings accounts, which means you owe more tax — the interest rate is higher, not the tax treatment.

When the bank reports your interest to the IRS

If you earned $10 or more in interest during the calendar year, your bank sends you a 1099-INT form by January 31 of the following year. The bank also sends a copy to the IRS. This form shows the total interest you earned at that bank.

If you have accounts at multiple banks, you will receive a separate 1099-INT from each one. You add them all together when you file your tax return. If you earned less than $10 in interest, the bank does not have to send you a form, but you still owe tax on that interest if you are required to file a return.

The 1099-INT arrives in the mail or electronically if you have set up online statements. Check it against your own records — banks make mistakes. If the amount is wrong, contact the bank and ask them to issue a corrected form.

How to report interest on your tax return

You report savings interest on Schedule B (Interest and Ordinary Dividends) if you are filing a federal return. If your total interest and dividends are under $1,500, you can report the interest directly on Form 1040 without filing Schedule B, but most people use Schedule B because it is clearer.

Write the name of each bank, the amount of interest from each 1099-INT, and add them up. That total goes on your Form 1040 as income. The IRS already has a copy of your 1099-INT from the bank, so they will cross-check it against what you report.

If you earned interest but did not receive a 1099-INT (because it was under $10, or the bank made an error), you still report it. Use the amount you see in your account statements or online banking records.

What your tax rate actually is on that interest

Your tax rate on savings interest is your marginal tax rate — the rate you pay on your last dollar of income. In 2024, federal rates range from 10% to 37% depending on your total income and filing status. Interest is added to your other income, so it pushes you into a higher bracket if you are close to the edge.

Example: You earn $50,000 in wages and $500 in savings interest. Your taxable income is $50,500. That $500 is taxed at whatever rate applies to income between $50,000 and $50,500 in your bracket. If you are single, that is the 22% bracket in 2024, so you owe roughly $110 in federal tax on that interest.

This is different from capital gains, which have their own lower rates. Interest is always taxed as ordinary income, never at the preferential capital gains rate.

State and local taxes on savings interest

Most states with an income tax tax savings interest the same way the federal government does — as ordinary income at your state rate. A few states do not tax interest income at all: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming have no state income tax. New Hampshire and Tennessee tax only interest and dividend income, not wages.

If you live in a city with a local income tax — Philadelphia, New York City, Columbus, and a handful of others — you owe local tax on savings interest too. The rate varies by city but typically ranges from 1% to 4%.

Your total tax on $500 of interest might be 22% federal plus 5% state plus 2% local, which adds up to 29% of the interest going to taxes. That is why the interest rate the bank advertises matters: a 4.5% rate becomes 3.2% after taxes if your combined rate is 29%.

Interest in tax-advantaged accounts versus regular savings

Interest earned inside a traditional IRA or 401(k) is not taxed in the year you earn it. The interest compounds tax-free until you withdraw money from the account, at which point you owe income tax on the withdrawal. This is the main tax advantage of these accounts.

Interest in a Roth IRA is not taxed at all, ever — neither when you earn it nor when you withdraw it, as long as you follow the withdrawal rules. This makes Roth accounts even more valuable for long-term savings.

Interest in a regular savings account, money market account, or CD is taxed every year, regardless of whether you withdraw the money. You owe tax on the interest even if you leave it in the account to compound. This is why some people move savings into IRAs or 401(k)s if they have the contribution room — the tax deferral lets the money grow faster.

What happens if you do not report the interest

The IRS receives a copy of your 1099-INT from the bank. If you do not report the interest on your return, the IRS will notice the discrepancy when they match your return against the forms they received. They will send you a notice asking for the tax owed, plus interest on the unpaid tax, plus a penalty.

The penalty for not reporting income is usually 20% of the unpaid tax, though it can be higher if the IRS determines the omission was intentional. Interest accrues daily on the unpaid balance. It is much cheaper to report the interest correctly the first time.

If you made an honest mistake, you can file an amended return (Form 1040-X) to correct it. The IRS may waive the penalty if you have a reasonable explanation, though they will still charge interest on the late payment.

Frequently Asked Questions

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

Yes. The $10 threshold only determines whether the bank has to send you a 1099-INT form. You still owe tax on any interest you earned, and you report it on your return using your account statements as proof. The IRS does not have a minimum threshold for taxable interest.

Is interest from a high-yield savings account taxed differently?

No. High-yield accounts earn more interest because the rate is higher, but the tax treatment is identical. You report the interest as ordinary income at your marginal rate, just like interest from any other savings account. The higher rate means higher interest, which means higher taxes.

What if I moved money between banks during the year?

Each bank reports only the interest earned in accounts you held at that bank. If you moved $10,000 from Bank A to Bank B in June, Bank A reports interest for January through June, and Bank B reports interest for June through December. You add both 1099-INTs together on your return. The transfer itself is not taxable — only the interest is.

Can I deduct any expenses against savings interest?

Generally no. Interest income is reported in full, and you cannot deduct the cost of maintaining the account or fees the bank charged. If you paid interest on a loan to buy investments, you might be able to deduct that investment interest, but that is a different situation and has strict limits.

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

Contact the bank when ready and ask them to issue a corrected 1099-INT (marked as a correction). They will send the corrected form to you and the IRS. Report the correct amount on your tax return. If you already filed and the amount was wrong, file an amended return with the correct interest amount.