All savings account interest above a certain threshold is taxable income

The interest your bank pays you on a savings account is income, and the IRS treats it the same way it treats wages or freelance earnings. You owe federal income tax on it. Most banks will send you a form called a 1099-INT at the end of the year if you earned $10 or more in interest during that year, and you report that amount on your tax return.

The tax you owe depends on your overall income and which tax bracket you fall into — the same brackets that explore to your salary or other earnings. If you earned $500 in interest and you're in the 22% tax bracket, you don't automatically owe $110; instead, that $500 gets added to your other income, and you pay tax on the combined total at your bracket rate.

Some states also tax savings interest as income, though a few states do not. Your state's tax rate, if it applies, is separate from federal tax and gets calculated on your state return.

Key Takeaways

  • Banks report savings interest of $10 or more per year on a 1099-INT form, which you must include on your federal tax return.
  • You pay federal income tax on savings interest at your regular tax bracket rate, not a special rate.
  • Some states tax savings interest as income and some do not, so check your state's rules.
  • High-yield savings accounts earn more interest than traditional savings accounts, which means more taxable income but also more money in your account.
  • 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 receive the 1099-INT form and what it means

Your bank will mail or email you a 1099-INT form by January 31 of the year following the one in which you earned the interest. This form shows how much interest you earned in that calendar year. You get one copy to keep for your records and another copy goes to the IRS, so the IRS already knows about your interest income before you file your return.

If you have accounts at multiple banks, you may receive more than one 1099-INT — one from each bank. You add up all the interest reported across all your forms and report the total on your tax return. If you earned less than $10 in interest at a particular bank, that bank may not send you a form, but you still owe tax on that interest if your total from all sources is $10 or more.

The 1099-INT also reports any interest withheld for taxes, though banks rarely withhold from savings interest unless you ask them to. If tax was withheld, that amount counts as a payment toward your tax bill.

How your tax bracket determines what you actually owe

Interest income is "ordinary income," meaning it's taxed at the same rate as your wages. If you earn $50,000 in salary and $1,000 in savings interest, the IRS treats you as earning $51,000 total, and you pay tax on all of it at your bracket rate.

Your tax bracket depends on your filing status (single, married filing jointly, head of household, and so on) and your total income. For 2024, a single person with $51,000 in income falls into the 22% federal bracket, but that doesn't mean you pay 22% on every dollar. The bracket system is progressive: you pay 10% on the first portion, then 12% on the next portion, then 22% on the remainder. The interest you earn pushes you into higher portions of the bracket, but only the interest itself is taxed at the marginal rate — the rate that applies to your highest dollars of income.

If you're retired or have very low income from other sources, your interest income might fall into the 10% or 12% bracket. If you have high income, it might be taxed at 24% or higher. This is why the same $1,000 in interest costs different people different amounts in tax.

State income tax on savings interest

Most states tax savings interest as ordinary income, explore their state income tax rate on top of federal tax. A few states — including Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming — do not have a state income tax at all, so residents pay no state tax on interest. New Hampshire and Tennessee tax only interest and dividend income, not wages.

If you live in a state with income tax, you report your interest on your state return the same way you do on your federal return. The 1099-INT you receive from your bank is used for both returns. State tax rates vary widely, from around 3% to over 10%, so the state tax on your interest can be substantial.

If you moved during the year or work in a different state than you live in, you may owe tax to more than one state. This is complex and depends on your specific situation, so consult a tax professional if this applies to you.

Interest in retirement accounts versus regular savings accounts

Interest earned inside a traditional IRA or 401(k) is not taxed in the year it's earned. Instead, you pay tax on the money when you withdraw it in retirement. This is one reason these accounts are valuable: your interest compounds without being reduced by taxes each year.

Interest in a Roth IRA is also not taxed when earned, and if you follow the rules, you pay no tax on it when you withdraw it either — not even on the interest itself. This makes Roth accounts especially powerful for long-term savings.

A regular savings account, by contrast, is taxed every single year on the interest you earn. This is why some people keep emergency funds in regular savings (because they need quick access) but put longer-term money into retirement accounts if they're able to.

How high-yield savings accounts affect your tax bill

A high-yield savings account earns significantly more interest than a traditional savings account — sometimes 4% to 5% annually, compared to 0.01% or less at many large banks. This is good news for your savings, but it means more taxable income.

If you have $10,000 in a high-yield account earning 4.5%, you'll earn $450 in interest over a year. If you're in the 22% federal bracket and your state taxes income at 5%, you'll owe roughly $122 in combined taxes on that interest. You still come out ahead — you have $328 more than you started with — but the tax bill is real and worth planning for.

This doesn't mean you should avoid high-yield accounts. It means you should know that the interest is taxable and budget for the tax bill when you file your return. Some people set aside a small portion of the interest they earn to cover taxes, or they plan to pay the tax from other income.

Reporting interest on your tax return

When you file your federal return, you report your total interest income on Schedule 1 (Form 1040), which feeds into your main tax form. If you use tax software, it will ask you for the amount from your 1099-INT and fill in the form for you. If you file by hand or with a tax professional, they will enter the amount in the interest income section.

You don't need to attach the 1099-INT to your return, but you should keep it with your tax records for at least three years in case the IRS has questions. The IRS receives a copy directly from your bank, so they know what you reported.

If you earned interest but didn't receive a 1099-INT (because it was under $10 or the bank made an error), you still report it. Look at your year-end account statements to find the total interest earned and report that amount.

Frequently Asked Questions

Do I have to pay taxes on interest if I earned less than $10?

Your bank doesn't have to send you a 1099-INT if you earned less than $10, but you still owe tax on that interest if your total interest from all sources reaches $10 or more. Check your account statements to find the exact amount and report it on your return.

What if I earned interest but didn't get a 1099-INT?

Contact your bank and ask them to send one. If they don't, use your account statements to find the interest amount and report it anyway. The IRS may contact you if there's a discrepancy, so it's better to report it yourself.

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

No. You report the full interest amount on your tax return. You cannot subtract fees or other expenses related to the account. However, some account fees may be deductible as miscellaneous expenses under certain circumstances — ask a tax professional about your specific situation.

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

Yes. Money market accounts are savings accounts, and the interest is reported on a 1099-INT and taxed as ordinary income at your regular tax bracket rate, just like interest from any other savings account.

What if I'm a dependent and earned interest on my own account?

You must report the interest on your own tax return, even if you're claimed as a dependent on your parent's return. Your parents cannot claim your interest income as their own. If your interest is your only income and it's below the threshold for filing (which varies by age and filing status), you may not have to file, but you should check the IRS rules for your situation.