The tax you pay depends on the interest your account earns, not on the balance itself
You do not pay tax on the money sitting in your savings account. You pay tax only on the interest — the money the bank pays you for letting them use your deposits. If your account earns no interest, you owe no tax on it. If it earns $50 in interest over a year, that $50 is what gets taxed.
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 it by January 31 each year if you earned $10 or more in interest during the previous year. You then report that interest as income on your tax return, just like wages or other earnings.
The tax rate you pay on savings interest is the same as your regular income tax rate. If you are in the 22% tax bracket, you pay 22% of your interest as federal income tax. Some states also tax interest income, though a few do not.
Key Takeaways
- You are taxed only on interest earned, not on your account balance, and only if that interest reaches $10 or more in a year.
- The bank sends you a 1099-INT form by January 31 showing how much interest you earned, which you report on your tax return.
- Interest is taxed at your regular income tax rate, which varies based on your total income and filing status.
- Some states do not tax interest income, while others do, so the total tax you owe depends on where you live.
- High-yield savings accounts earn more interest than traditional accounts, which means higher taxes on that interest.
When you have to report interest income
If your savings account earned $10 or more in interest during the year, the bank must send you a 1099-INT form. You are required to report this interest on your federal tax return, even if the bank did not send the form (though it should have).
If you earned less than $10, the bank does not have to send a form, but you still owe tax on that interest if you file a return. Many people with small savings accounts do not file a return at all, so this does not affect them. But if you file a return for any reason — because you had wages, self-employment income, or other earnings — you must include all interest you earned, no matter how small.
You report this interest on your tax return in the section for income. On the federal form 1040, this goes on the line for interest income. If you use tax software, it usually asks you directly about interest earned.
How your tax bracket affects what you owe
Your tax bracket is the percentage of your income that goes to federal income tax. It depends on how much total income you earned that year and whether you file as single, married, or head of household. The more income you have, the higher your bracket.
If you earned $50 in interest and you are in the 12% bracket, you owe $6 in federal tax on that interest. If you are in the 24% bracket, you owe $12. The interest itself does not change — only the tax rate applied to it.
This is why high-yield savings accounts can be a mixed blessing. They pay more interest than traditional savings accounts, which is good for growing your money. But that higher interest also means a higher tax bill. A high-yield account paying 4% interest will generate more taxable income than a regular account paying 0.01%, even if the balance is the same.
State and local taxes on savings interest
Most states tax interest income the same way the federal government does — as regular income at your state tax rate. A few states do not tax interest at all. These include Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming.
If you live in a state that taxes interest, you report it on your state tax return. Some states have their own forms similar to the federal 1099-INT. Your bank may send you a state-specific form, or you may use the same 1099-INT for both federal and state reporting.
A handful of states offer special treatment for interest earned on certain types of savings accounts — for example, accounts opened for education or retirement. These are less common for regular savings accounts, but it is worth checking your state's tax rules if you have a large balance earning significant interest.
What happens if you do not report interest income
The IRS receives a copy of every 1099-INT the bank sends to you. If you do not report the interest on your tax return, the IRS will notice the mismatch between what you reported and what the bank reported. This can trigger a notice asking you to explain the difference.
If the interest was small and you straightforward forgot, you can usually file an amended return and pay the tax owed plus a small penalty. If the IRS believes you intentionally hid income, the penalties are much larger — up to 75% of the unpaid tax in some cases, plus interest on the unpaid amount.
The safest approach is to report all interest income, even if it is small. The tax owed on a few dollars in interest is usually minimal, and reporting it takes only a few minutes when you file your return.
How to reduce taxes on savings interest
You cannot avoid paying tax on interest you earn, but you can reduce the amount of interest you earn in the first place by keeping money in lower-interest accounts. This is not usually a good strategy — the tax savings are small compared to the interest you lose.
A more practical approach is to keep emergency savings in a regular savings account (which earns little interest and generates little tax) and put money you do not need for several years into a high-yield savings account or other accounts that earn more. This way, you earn more interest overall while keeping some money in a lower-tax situation.
If you have a very large balance earning significant interest, you might also consider whether a certificate of deposit (CD) or money market account makes sense for your goals. These are not tax-advantaged, but they may offer better rates than savings accounts, and the interest is still taxed the same way.
Interest from different types of accounts
All interest earned in a bank savings account is taxed as ordinary income. This includes interest from regular savings accounts, money market accounts, and CDs. The 1099-INT form covers all of these.
Interest from other sources — such as bonds, Treasury bills, or peer-to-peer lending — is also reported on a 1099-INT or a similar form. The tax treatment is the same: it is added to your income and taxed at your regular rate.
Retirement accounts like IRAs and 401(k)s are different. Interest earned inside these accounts is not taxed each year. Instead, you pay tax when you withdraw the money in retirement. This is one reason these accounts are useful for long-term savings — the interest compounds without being reduced by annual taxes.
Frequently Asked Questions
Do I have to pay taxes on interest if I earned less than $10?
The bank does not have to send you a 1099-INT form if you earned less than $10. However, you still owe tax on that interest if you file a tax return. Report it on your return even if you did not receive a form.
What if I have multiple savings accounts at different banks?
Each bank sends a separate 1099-INT for the interest earned at that bank. You add up all the interest from all your accounts and report the total on your tax return. The IRS receives copies of all the forms, so they will know the total as well.
Can I deduct savings account fees from the interest I report?
No. You report the full interest amount on your return. Fees are not deductible against interest income for most people. However, if you have significant investment expenses, you may be able to deduct them in other situations — consult a tax professional about your specific case.
Is interest from a high-yield savings account taxed differently?
No. Interest from a high-yield savings account is taxed the same way as interest from any other savings account — as ordinary income at your regular tax rate. The higher interest rate means a higher tax bill, but the tax treatment is identical.
What if I closed my account during the year?
You still report all interest earned from January 1 through December 31, even if you closed the account in June. The bank reports the full year's interest on the 1099-INT, and you report it on your return.