The money in your savings account itself is not taxed — only the interest it earns

Your savings balance is yours to keep. The IRS does not tax the principal amount sitting in your account. What gets taxed is the interest — the money the bank pays you for letting them use your deposits. If you have $5,000 in savings and earn $25 in interest over a year, that $25 is what you owe tax on, not the $5,000.

The bank reports this interest to you and to the IRS on a form called a 1099-INT (or sometimes a 1099-OID). You receive this form by January 31 each year if you earned $10 or more in interest during the previous year. The amount on that form is what you include when you file your taxes.

How much tax you actually owe on that interest depends on your total income and your tax bracket — the percentage rate that applies to your income level. Someone earning $30,000 a year pays a different rate than someone earning $100,000. Your interest income gets added to your other income, and the total determines your tax.

Key Takeaways

  • Banks report savings interest to the IRS on a 1099-INT form if you earn $10 or more in a year.
  • You owe federal income tax on interest earned, but not on your original savings balance.
  • The tax rate on your interest depends on your total income for the year and your tax bracket.
  • Some states also tax interest income, while others do not — this varies by where you live.
  • High-yield savings accounts earn more interest, which means you owe more tax on the earnings.

When the bank sends you a 1099-INT form

You will receive a 1099-INT if your interest earnings reach $10 for the year. Some banks send it even if you earned less, but $10 is the threshold the IRS uses. The form arrives in the mail or electronically through your bank's website by January 31.

The 1099-INT shows the total interest your account earned during the previous calendar year. If you have multiple savings accounts at different banks, each bank sends its own 1099-INT. You add up all the interest from all your forms when you file your taxes.

If you earned less than $10 in interest, you still owe tax on it — you just will not receive a 1099-INT. You can find the exact amount by logging into your bank account online or calling the bank. Many banks show year-to-date interest in your account dashboard.

How your tax bracket affects what you owe

The federal government uses a system of tax brackets. Your bracket is determined by your total income for the year — wages, self-employment income, interest, dividends, and other sources combined. The higher your total income, the higher the percentage rate applied to your interest earnings.

For example, if you are single and earned $35,000 in wages plus $150 in savings interest, your total taxable income is $35,150. That total income places you in a specific bracket, and the interest portion is taxed at that bracket's rate. If you were single and earned $100,000 in wages plus the same $150 in interest, that interest would be taxed at a higher rate because your total income is higher.

You do not need to calculate your bracket yourself. When you file your taxes — either on your own using tax software or with a tax preparer — they determine your bracket based on your total income and calculate what you owe.

State income tax on savings interest

Some states tax interest income the same way the federal government does. Other states do not tax interest at all. A few states tax interest but exempt it below a certain amount. Where you live determines whether you owe state tax on your savings interest.

States that do not tax interest income include Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming. If you live in one of these states, you owe federal tax on your interest but no state income tax on it. If you live elsewhere, check your state's tax website or ask a tax preparer whether interest is taxed in your state.

Some people move between states during a year. If you moved and lived in two different states, you may owe tax to both — or to neither, depending on which states you lived in. This is a situation where a tax preparer can save you money by making sure you file correctly.

Why high-yield savings accounts mean higher taxes

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 large banks. This is good for your savings, but it means more interest income to report and more tax to owe.

If you have $10,000 in a high-yield account earning 4.5%, you will earn $450 in interest over a year. If that same $10,000 is in a traditional account earning 0.01%, you earn $1 in interest. The difference in taxes owed is substantial. This does not mean you should avoid high-yield accounts — the extra interest usually outweighs the extra tax — but it is important to understand that higher earnings mean higher tax liability.

When you are planning your savings, factor in that you will owe tax on the interest. If you earn $450 in interest and you are in a 22% tax bracket, you will owe roughly $99 in federal tax on that interest. Your net gain is still $351, which is far better than earning $1 and owing pennies in tax.

How to report interest on your tax return

When you file your federal taxes, you report interest income on Schedule B (if you have other investment income) or directly on Form 1040 (if interest is your only investment income). The exact form depends on how much interest you earned and what other income you have.

If you use tax software like TurboTax, H&R Block, or TaxAct, the software walks you through entering your 1099-INT information. You enter the amount from your 1099-INT, and the software automatically adds it to your total income and calculates your tax. If you work with a tax preparer, bring your 1099-INT forms with you, and they handle the reporting.

You must report all interest income, even if you did not receive a 1099-INT. If you earned $8 in interest and the bank did not send a form, you still report that $8 on your return. The IRS has records of what banks reported, and they cross-check tax returns against those records.

Interest earned in a child's savings account

If you open a savings account for a child, the interest is taxable income to the child, not to you as the parent. However, there is a threshold called the standard deduction below which a dependent child owes no federal tax. For 2024, a dependent child with only interest income owes no federal tax if that interest is below a certain amount (this amount changes yearly).

This means a child can earn a small amount of interest tax-free each year. Once interest exceeds that threshold, the child owes tax on the amount above it. If the child has other income (like wages from a job), the rules are different, and a tax preparer can help you understand what is owed.

State tax rules for children's interest vary. Some states follow the same standard deduction rule; others tax all interest regardless of amount. Check your state's rules or consult a tax preparer if you are setting up savings for a child.

Frequently Asked Questions

Do I owe tax on interest if I did not receive a 1099-INT?

Yes. The $10 threshold for receiving a 1099-INT is a reporting requirement, not a tax threshold. If you earned $5 in interest and did not receive a form, you still owe tax on that $5. Find the exact amount in your bank account online or by calling the bank, and report it on your tax return.

What if I earned interest in multiple savings accounts?

Add up the interest from all your accounts. Each bank sends its own 1099-INT if you earned $10 or more at that bank. When you file your taxes, report the total interest from all sources. The IRS receives copies of all your 1099-INT forms and expects your return to match the total.

Can I deduct savings account fees from my interest income?

No. Interest income is reported as a gross amount, and you cannot subtract fees or other costs from it on your tax return. However, some savings accounts do not charge fees, and high-yield accounts often have no monthly fees, so the interest you earn is the amount you keep and report.

Does moving money between my own savings accounts create taxable income?

No. Transferring money from one account to another is not income — it is just moving your own money. Only the interest the money earns is taxable. If you move $5,000 from savings account A to savings account B, that $5,000 transfer is not taxable. The interest both accounts earn is taxable.

What happens if I close my savings account mid-year?

You still owe tax on all the interest earned in that account up to the date you closed it. The bank reports the interest earned through the closing date on your 1099-INT. If you close the account in June and earned $30 in interest by then, you report that $30 on your taxes even though the account no longer exists.