You pay income tax on savings interest at your ordinary tax rate

The interest your bank pays you on a savings account is taxable income. The IRS treats it the same way it treats wages or salary — you owe federal income tax on it at whatever tax bracket you fall into. If you earn $500 in savings interest in a year and you're in the 22% tax bracket, you owe roughly $110 in federal tax on that interest alone.

Your bank will send you a form called a 1099-INT at the end of the year if you earned $10 or more in interest. This form lists exactly how much interest you earned. You report this amount on your tax return, and the IRS matches it against what your bank reported.

The tax rate you pay depends on your total income for the year, not just the interest. If you earn very little, you might owe no federal tax at all — even on the interest. If you earn a lot, the interest gets taxed at a higher rate. Some states also tax savings interest as income, though a few do not.

Key Takeaways

  • Savings account interest is taxed as ordinary income at your federal tax bracket, whether that's 10%, 22%, 24%, or higher.
  • Your bank sends you a 1099-INT form if you earn $10 or more in interest during the year, and you must report this on your tax return.
  • Some states tax savings interest as income and some do not, so your total tax bill depends on where you live.
  • You pay tax on the interest even if the bank does not withhold it — the tax is still owed when you file your return.

How the IRS knows about your interest earnings

Banks are required to report interest to the IRS. When you open a savings account, you provide your Social Security number or tax ID. At the end of each calendar year, the bank calculates how much interest you earned and files a 1099-INT with the IRS. The bank also mails or emails you a copy.

The IRS receives the same 1099-INT your bank sends you. When you file your tax return, you report the interest income. The IRS compares what you reported against what the bank reported. If the numbers don't match, the IRS will contact you.

This is why it matters even if you forget about the interest or think it's too small to report. The IRS already knows the amount. Failing to report it can trigger an audit or a notice asking you to pay the tax you owe plus penalties.

What tax bracket your interest falls into

Your tax bracket is determined by your total income for the year — wages, self-employment income, interest, dividends, and other sources combined. The interest you earn gets added to that total, and you pay tax at whatever rate applies to your bracket.

For example, if you earn $35,000 in wages and $500 in savings interest, your taxable income is $35,500. You pay tax on the full $35,500 at the rates that explore to your bracket. You don't pay tax on the interest separately at a different rate.

The federal tax brackets change each year. For 2024, the brackets range from 10% to 37% depending on your income and filing status. You can find the current brackets on the IRS website or ask a tax preparer what bracket you fall into.

State income tax on savings interest

Most states that have an income tax also tax savings interest. The rate varies by state — some states tax it at the same rate as wages, and some have a separate rate for investment income. A few states, like Texas, Florida, and Tennessee, do not have a state income tax at all, so you owe no state tax on interest.

If you live in a state with income tax, your state will also receive a copy of the 1099-INT from your bank. You report the interest on your state tax return as well as your federal return. Some states allow you to exclude a small amount of interest income — check your state's rules or ask a tax preparer.

If you moved during the year, you may owe tax to two states. The state where you lived when you earned the interest typically gets the tax, but rules vary. This is one reason to keep track of when you moved and where you held accounts.

When you don't owe tax on interest

If your total income is below the standard deduction for your filing status, you owe no federal income tax — even if you earned interest. The standard deduction is the amount of income the government allows you to earn tax-free each year. For 2024, the standard deduction is $14,600 for a single person and $29,200 for a married couple filing jointly, though these amounts change yearly.

For example, if you're single, earn $12,000 in wages, and earn $500 in savings interest, your total income is $12,500. This is below the $14,600 standard deduction, so you owe no federal tax. You still receive the 1099-INT, but you don't have to report the interest on your return.

State rules differ. Some states have a lower threshold than the federal standard deduction, so you might owe state tax even if you owe no federal tax. Check your state's rules or use a tax preparer to be sure.

How much interest triggers a 1099-INT

Your bank must send you a 1099-INT if you earned $10 or more in interest during the calendar year. If you earned less than $10, the bank is not required to send the form, but the interest is still taxable income.

Many people with multiple savings accounts across different banks might not realize that each bank files its own 1099-INT. If you have accounts at three banks and earn $5 in interest at each one, you'll receive three separate 1099-INT forms totaling $15. You must report all of it on your tax return.

The $10 threshold has been the same for many years, but Congress has proposed raising it. Check with your bank if you're unsure whether you'll receive a form, or assume you will if you earn more than $10 in a year.

Withholding and estimated tax payments

Banks do not withhold income tax from savings interest the way employers withhold from paychecks. You receive the full interest amount, and you owe the tax when you file your return. This means you need to set aside money to pay the tax yourself.

If you earn a large amount of interest — for example, from a recent inheritance or a large deposit — you might want to make an estimated tax payment to the IRS during the year rather than waiting until tax time. This avoids owing a large bill in April. You can make estimated payments online through the IRS website.

Most people with small savings accounts don't need to worry about this. If your interest is a few hundred dollars or less, you can usually just pay the tax when you file your return in the spring.

Frequently Asked Questions

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

Yes. The $10 threshold only determines whether your bank sends you a 1099-INT form. Interest is taxable income regardless of the amount. If you earned $5 in interest, it's still taxable, and you should report it on your return. The IRS may not catch small amounts, but you're legally required to report all interest income.

What if I earned interest at multiple banks?

Each bank files its own 1099-INT. You'll receive one from each bank where you earned $10 or more in interest. Add up all the interest from all your accounts and report the total on your tax return. The IRS receives all the 1099-INT forms and will notice if your reported total doesn't match.

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 costs. However, if you paid significant investment-related expenses, you might be able to deduct them separately on your return — ask a tax preparer whether this applies to your situation.

Does a high-yield savings account get taxed differently?

No. A high-yield savings account earns more interest, but the interest is taxed the same way as interest from a regular savings account — as ordinary income at your tax bracket. The higher interest means a higher tax bill, but the tax treatment is identical.

What if I moved to a different state during the year?

You typically owe tax to the state where you lived when you earned the interest. If you moved mid-year, you may owe tax to both your old state and your new state, though some states have agreements to avoid double taxation. Report your move when you file your return, and consider asking a tax preparer for help if you moved during the year.