You pay income tax on the interest your savings account earns, at your ordinary income tax rate

The money you deposit into a savings account is yours and not taxed. But the interest the bank pays you for letting them use that money is income, and the IRS treats it like wages or salary. You owe federal income tax on it at whatever rate applies to your tax bracket. Some states also tax savings interest, though rules vary by where you live.

The amount of tax you actually pay depends on three things: how much interest you earned, what your total income was that year, and which tax bracket you fall into. A person earning $30,000 a year pays tax on savings interest at a lower rate than someone earning $150,000. The interest itself is small enough that for most people it does not push them into a higher bracket, but it still counts as taxable income.

Key Takeaways

  • Banks report savings interest to the IRS on a Form 1099-INT if you earned $10 or more in interest during the year.
  • You owe federal income tax on all savings interest at your marginal tax rate, which depends on your total income and filing status.
  • Some states tax savings interest and some do not; your state's rules depend on where you live and file taxes.
  • Interest earned in a traditional IRA or 401(k) is not taxed until you withdraw money, but interest in a Roth IRA grows tax-free.

How the IRS knows about your savings interest

Banks send a Form 1099-INT to the IRS and to you if you earned $10 or more in interest during the calendar year. This form shows exactly how much interest you made. You receive it by January 31 of the following year, and you use it to fill out your tax return.

If you earned less than $10, the bank does not have to send a 1099-INT, but you still owe tax on that interest if you file a return. The IRS can cross-check your return against the 1099-INT forms banks file, so underreporting or omitting interest is how the IRS catches discrepancies. If you move banks during the year, you may receive multiple 1099-INT forms—one from each bank—and you add all the interest together on your return.

What tax rate applies to your savings interest

Savings interest is taxed as ordinary income, meaning it uses the same tax brackets as your wages or salary. In 2024, federal tax brackets range from 10% to 37% depending on how much total income you have and whether you file as single, married filing jointly, or another status. If you earned $47,150 as a single filer, you are in the 22% bracket, so your savings interest is taxed at 22%.

This does not mean you pay 22% on every dollar of interest. It means the interest is added to your other income, and the portion of your total income that falls in the 22% bracket gets taxed at 22%. For most people, savings interest is small enough that it does not change which bracket they are in. A person earning $47,000 in wages who makes $200 in savings interest still files in the 22% bracket; the interest just adds $200 to their taxable income.

You can reduce the tax you owe by claiming the standard deduction (which lowers your taxable income) or by itemizing deductions if you have enough to exceed the standard amount. But the interest itself cannot be deducted—you cannot write it off as a business expense or charitable donation.

State and local taxes on savings interest

Whether you owe state income tax on savings interest depends on which state you live in and file taxes in. Most states that have an income tax tax savings interest the same way the federal government does—as ordinary income at your state tax 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 state with income tax, your state tax rate is usually lower than the federal rate. State rates typically range from about 3% to 13%, depending on the state and your income level. Some cities also tax income; New York City, for example, adds a local income tax on top of state and federal taxes. You report state and local taxes separately on your state return, which you file in addition to your federal return.

Tax-advantaged accounts that reduce or eliminate tax on interest

If you want to avoid paying tax on savings interest, you can use a Roth IRA or Roth 401(k). Money you put into these accounts grows tax-free, and you pay no tax on the interest, dividends, or gains when you withdraw the money in retirement. The catch is that you can only contribute a limited amount each year ($7,000 for an IRA in 2024 if you are under 50), and you cannot withdraw the money before age 59½ without penalties in most cases.

A traditional IRA or 401(k) defers tax instead of eliminating it. Interest earned inside these accounts is not taxed while the money sits there, but you pay income tax on the full amount you withdraw in retirement. This can be useful if you expect to be in a lower tax bracket after you retire, but it does not eliminate the tax—it just pushes it to later.

A 529 college savings plan works similarly to a Roth account for education expenses: interest grows tax-free, and you pay no tax on withdrawals if you use the money for may have access to education costs. If you withdraw money for non-education purposes, you pay tax on the earnings portion plus a 10% penalty.

When you have to report savings interest on your tax return

You report savings interest on Schedule B (Interest and Ordinary Dividends) if you received a 1099-INT or if you earned interest that was not reported on a form. The interest amount goes into your total income, which determines your tax bracket and how much tax you owe overall.

If you earned less than $1,500 in interest and dividends combined and had no other investment income, you can report the interest directly on your 1040 form without filing Schedule B. But if you earned more than that, or if you have multiple sources of interest or investment income, you must use Schedule B. Your tax software usually handles this automatically if you enter the 1099-INT information.

How much interest you actually earn after taxes

The interest rate a bank advertises is the rate before taxes. If a savings account pays 4.5% annual percentage yield (APY) and you have $10,000 in the account, you earn $450 in interest over a year. But if you are in the 22% federal tax bracket and your state taxes at 5%, you owe $135 in federal tax and $22.50 in state tax, leaving you with $292.50 after taxes. Your actual after-tax return is about 2.9%.

This is why the interest rate matters more when rates are higher. At 0.01% APY (common during low-rate periods), the tax on $10,000 is less than $1, so taxes barely affect your return. At 4.5% or higher, taxes take a meaningful chunk. If you are in a high tax bracket, the after-tax return is even lower. This is one reason people use tax-advantaged accounts for larger savings—the tax savings can be substantial over time.

Frequently Asked Questions

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

The bank does not have to send you a 1099-INT if you earned less than $10, but you still owe tax on that interest if you file a return. You report it on Schedule B or directly on your 1040. The IRS expects all interest income to be reported, regardless of the amount.

What if I earned interest in multiple savings accounts?

Add up all the interest from all your accounts and report the total on your tax return. You may receive multiple 1099-INT forms (one from each bank), and you combine them into a single total on Schedule B. The IRS receives copies of all the forms, so they will see the total anyway.

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

No. You report the full interest amount on your return; you cannot subtract fees or other costs. However, if you paid investment advisory fees or other expenses to manage your investments, you may be able to deduct those under certain conditions. Ordinary account maintenance fees are not deductible.

Does interest in a high-yield savings account get taxed differently?

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

What happens if I move money between savings accounts during the year?

Moving money between your own accounts does not create taxable income. Only the interest the bank pays you is taxable. If you transfer $5,000 from one savings account to another, that transfer is not taxed. The interest earned on that $5,000 is taxed when you report it.