You pay income tax on the interest your savings account earns, not on the money you deposited

The money you put into a savings account is yours—you don't pay tax on it. But the interest the bank pays you counts as income, and you owe federal income tax on it. Some states also tax savings interest. The amount you owe depends on how much interest you earned and your overall income for the year.

Your bank will send you a form called a 1099-INT (Interest Income) if you earned $10 or more in interest during the year. You report this amount on your federal tax return. Even if you don't receive a 1099-INT, you still owe tax on any interest you earned—the bank's reporting requirement doesn't change what you legally owe.

Key Takeaways

  • Interest earned in a savings account is taxed as ordinary income at your federal tax rate, which ranges from 10% to 37% depending on your total income.
  • Your bank sends a 1099-INT form if you earned $10 or more in interest, and you report this on your tax return even if the amount is small.
  • Some states tax savings interest, while others do not—check your state's rules or ask your tax preparer about your specific location.
  • High-yield savings accounts earn more interest than traditional savings accounts, which means you will owe more tax on the earnings.
  • You can reduce taxable interest by holding money in tax-advantaged accounts like IRAs or 529 plans, though these have contribution limits and rules.

Federal tax rates on savings interest

The federal tax rate you pay on savings interest is the same as your regular income tax rate. If you earn $23,200 to $94,300 as a single filer in 2024, you're in the 22% bracket, so you'd owe 22% of your interest as federal tax. If you earn less, your rate is lower (10% or 12%). If you earn more, your rate is higher (up to 37% for the highest earners).

This means a high-yield savings account earning 4.5% interest doesn't actually net you 4.5%—you keep only what's left after taxes. If you're in the 22% bracket and earn $450 in interest, you owe about $99 in federal tax, leaving you with $351. The exact amount depends on your full year's income, because interest is added to your other income to determine which tax bracket you fall into.

State taxes on savings interest

Nine states do not tax income at all: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, Wyoming, and New Hampshire (though New Hampshire taxes only interest and dividends, not wages). If you live in one of these states, you owe no state tax on savings interest.

Every other state taxes savings interest as part of your regular income. State tax rates range from about 1% to over 13%, depending on the state and your income level. Some states have a flat rate (the same percentage for everyone), while others use brackets like the federal system. You'll report your interest income on your state tax return the same way you report it federally—using the 1099-INT your bank sends you.

When you receive a 1099-INT and what to do with it

Banks mail 1099-INT forms by January 31 each year for interest earned during the previous year. You receive one copy, and the bank sends another to the IRS. If you earned less than $10 in interest, your bank may not send a form, but you still owe tax on that interest if you file a return.

When you file your tax return, you report the amount from box 1 of your 1099-INT on Schedule B (Interest and Ordinary Dividends) if you earned more than $1,500 in interest and dividends combined. If you earned $1,500 or less, you can report the interest directly on your Form 1040. If you use tax software or a tax preparer, they'll ask you for this information and place it in the right spot.

If you earned interest from multiple accounts, you'll receive multiple 1099-INT forms—one from each bank or financial institution. Add them all together and report the total on your return.

How high-yield savings accounts affect your tax bill

A high-yield savings account earns significantly more interest than a traditional savings account—often 4% to 5% compared to 0.01% or less. This is good for your savings, but it means a larger tax bill. If you have $10,000 in a high-yield account earning 4.5%, you'll earn $450 in interest per year. In the 22% federal bracket, that's $99 in federal tax plus whatever your state charges.

The higher interest is still worth it for most people—you're keeping more money overall even after taxes. But it's worth knowing that the interest you see advertised is the gross amount before taxes. When you're comparing savings accounts, factor in that you'll owe tax on the earnings.

Tax-advantaged accounts that reduce or eliminate taxes on interest

If you want to save money without paying tax on the interest, certain accounts let you do that. A traditional IRA or 401(k) lets your money grow tax-free until you withdraw it in retirement. A Roth IRA lets your money grow completely tax-free, and you owe no tax on withdrawals in retirement either. A 529 college savings plan lets you save for education expenses tax-free.

These accounts have limits on how much you can contribute each year and rules about when you can withdraw the money without penalties. A traditional IRA, for example, lets you contribute up to $7,000 per year (as of 2024), and you can't withdraw before age 59½ without paying a 10% penalty plus income tax. A 529 plan is limited to education expenses, though recent rule changes allow some transfers to Roth IRAs.

For most people, maxing out these accounts first—before putting extra money in a regular savings account—makes sense from a tax perspective. But if you've hit the contribution limits and still have money to save, a high-yield savings account is still better than keeping cash in a checking account earning nothing.

Frequently Asked Questions

Do I owe taxes on savings interest if I don't receive a 1099-INT?

Yes. The 1099-INT is just the bank's way of reporting to the IRS. If you earned interest but didn't receive a form (usually because it was under $10), you still owe tax on it. The IRS expects you to report all interest income, whether or not you receive a form.

What if I earned interest in multiple savings accounts?

Add up the interest from all your accounts and report the total on your tax return. You'll receive a separate 1099-INT from each bank, so gather them all before filing. If the total is $1,500 or less, you can report it directly on Form 1040; if it's more, use Schedule B.

Can I deduct savings account fees from my interest income?

No. You report the gross interest the bank paid you, not the net amount after fees. However, if you paid investment advisory fees or fees to a tax preparer, those may be deductible under certain circumstances—ask your tax preparer about your specific situation.

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

Yes. Money market accounts are treated the same as savings accounts for tax purposes. You'll receive a 1099-INT and report the interest as ordinary income on your federal and state returns.

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

Moving money doesn't create a tax event. You only owe tax on the interest the bank paid you, not on transfers between your own accounts. The interest is reported based on which institution held the money when it was earned.