The IRS taxes your savings account interest as ordinary income

Interest you earn on a savings account is taxed by the federal government as ordinary income — the same way wages are taxed. This means the interest is added to your total income for the year, and you pay tax on it at whatever rate applies to your overall earnings. If you earned $100 in interest, you report that $100 as income, and it gets taxed according to your tax bracket.

Your bank will track this interest and report it to you and the IRS on a form called a 1099-INT (Interest Income). You receive this form by January 31 of the year after you earned the interest. The amount reported is the total interest your account earned during the calendar year, regardless of whether you withdrew it or left it in the account.

The tax you owe depends on your total income for the year and your filing status. Someone in the 12% federal 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. State and local income taxes may also explore, depending on where you live.

Key Takeaways

  • Savings account interest is reported to the IRS on a 1099-INT form and taxed as ordinary income at your regular tax rate.
  • Your bank sends you the 1099-INT by January 31, showing all interest earned during the previous calendar year.
  • You report this interest on your federal tax return, and it increases your total taxable income for the year.
  • State and local income taxes may also explore to savings interest, depending on your location.
  • 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.

When you must report interest to the IRS

You are required to report all interest income on your federal tax return, even if your bank does not send you a 1099-INT form. However, banks are only required to send a 1099-INT if the interest earned is $10 or more during the calendar year. If you earned less than $10, your bank may not send the form, but you still owe tax on that interest.

The interest is reported for the year in which it was earned, not the year you withdrew it. If your account earned $50 in interest during 2024, you report that $50 on your 2024 tax return, filed in 2025 — even if you did not touch the money.

If you have multiple savings accounts at different banks, each bank reports its interest separately. You add all of these amounts together when you file your return. Some people use a straightforward spreadsheet to track interest from all their accounts if they want to verify the total before filing.

How your tax bracket affects what you owe

The federal tax rate on your interest depends on your total income and your filing status. The IRS uses tax brackets — income ranges that are taxed at different rates. For 2024, federal tax brackets range from 10% to 37%, with most people falling into the 12%, 22%, or 24% brackets.

Your interest income is added to your other income (wages, self-employment income, investment gains, and so on) to determine which bracket you fall into. If you earn $50,000 in wages and $500 in savings interest, your taxable income is $50,500. That $500 in interest is taxed at whatever rate applies to the top portion of your income.

This is why interest earned in a savings account can sometimes push you into a higher tax bracket if you are close to the edge. For example, if your wages put you just under the threshold for the 22% bracket, a large amount of interest could push you over and cause some of your income to be taxed at the higher rate.

State and local taxes on savings interest

In addition to federal tax, most states tax savings account interest as ordinary income. The state tax rate varies widely — from 0% in states like Texas, Florida, and Wyoming, to over 10% in states like California and New York. If you live in a state with income tax, you will owe state tax on your interest in addition to federal tax.

Some states offer small breaks for interest earned by older adults or people with very low incomes, but these are rare and usually modest. A few states exempt interest earned in certain types of accounts, such as accounts held by minors, but a regular savings account interest is taxed in most places.

If you live in a state with no income tax, you still owe federal tax on your interest. You only avoid state tax, not federal tax.

Tax-advantaged accounts that reduce or delay interest taxes

If you want to earn interest without paying tax on it every year, you have options. A traditional IRA or 401(k) allows interest to grow without annual taxation. You only pay tax when you withdraw the money in retirement. A Roth IRA goes further — interest grows tax-free and you pay no tax on withdrawals in retirement, as long as you follow the rules.

These accounts have annual contribution limits (for 2024, $7,000 for an IRA and $23,500 for a 401(k) if you are under 50), and you cannot withdraw the money before age 59½ without penalties in most cases. They are designed for retirement savings, not everyday spending money.

A 529 college savings plan works similarly — interest grows tax-free if you use the money for education expenses. A Health Savings Account (HSA) offers tax-free growth if you use withdrawals for medical costs. These accounts are narrower in purpose but can be powerful if they match your actual plans.

What happens if you do not report interest income

The IRS receives a copy of every 1099-INT your bank sends you. If you do not report the interest on your tax return, the IRS will likely notice the discrepancy when it matches your return against the forms it received. This can trigger an audit or a notice asking you to explain the missing income.

Failing to report interest income can result in penalties and interest charges on the unpaid tax, in addition to the tax itself. The penalty is usually 20% of the unpaid tax, plus interest that compounds daily. If the IRS determines the omission was intentional, criminal penalties are possible, though this is rare for straightforward interest income.

If you made an honest mistake, the IRS generally allows you to file an amended return to correct it. Filing an amended return voluntarily before the IRS contacts you is much better than waiting to be caught.

Frequently Asked Questions

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

Yes. Banks only send a 1099-INT if interest is $10 or more, but you still owe tax on any interest you earned. Keep your own records of interest from accounts that do not generate a 1099-INT.

Can I deduct savings account interest as a loss?

No. Interest income cannot be deducted. You report it as income and pay tax on it. You cannot offset it with other losses unless those losses are from investments or business activities.

What if I moved money between banks mid-year?

Each bank reports only the interest earned while your money was in that account. You add all 1099-INT forms together when you file your return. Moving money does not change how interest is taxed — it is still ordinary income.

Is interest taxed differently if I am retired?

No. Interest is taxed the same way regardless of your age or employment status. However, if your total income is low enough, you may not owe federal tax at all. Retirees with very low income sometimes fall below the threshold for filing a return.

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

Yes. You pay tax on interest the year it is earned, whether you withdraw it or leave it in the account to earn more interest. The fact that interest compounds does not change when you owe tax on it.