The tax you owe depends on how much interest your account earns

Interest from a savings account is taxable income. The IRS treats it the same way it treats wages or freelance earnings — you report it on your tax return, and you owe federal income tax on it at your regular tax rate. There is no separate "savings tax" or lower rate for interest. If you earn $500 in interest and you are in the 22% tax bracket, you owe roughly $110 in federal tax on that interest.

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. Some states also tax savings interest, though a few do not.

You do not pay tax on the money itself — only on the interest it earns. If you put $10,000 in a savings account and it earns $50 in interest over the year, you owe tax on the $50, not the $10,000.

Key Takeaways

  • Savings account interest is taxed as ordinary income at your regular federal tax rate, which ranges from 10% to 37% depending on your total income.
  • You report interest on Form 1040 and Schedule 1, and your bank sends you a Form 1099-INT if you earned $10 or more in interest during the year.
  • Some states tax savings interest and some do not; check your state's tax rules if you live in a state with income tax.
  • Interest earned in a traditional IRA or 401(k) is not taxed until you withdraw the money, but interest in a Roth IRA is never taxed.

How the IRS knows about your interest

Your bank tracks the interest you earn and reports it to the IRS on a Form 1099-INT. The bank sends you a copy in January or early February each year, showing how much interest you earned in the previous year. If you earned $10 or more in interest, the bank is required to file this form with the IRS.

You then report that same amount on your tax return. The IRS cross-checks: they receive the 1099-INT from your bank, and they also receive your tax return. If the numbers do not match, you will likely get a notice asking you to explain the difference.

If you earned less than $10 in interest, your bank may not send a 1099-INT, but you still owe tax on that interest if you file a return. You report it yourself based on your bank statements.

Federal tax brackets for savings interest

Your tax rate on savings interest is the same as your tax rate on other income. The IRS uses tax brackets — ranges of income that are taxed at different rates. In 2024, the federal brackets range from 10% to 37%.

Here is how it works: if you are single and earn $47,000 in wages, and you earn $500 in savings interest, your total income is $47,500. That $500 in interest is taxed at the marginal rate for your bracket — the rate that applies to the last dollars you earned. For a single person in 2024, income between $47,025 and $100,525 is taxed at 22%. So that $500 in interest costs you roughly $110 in federal tax.

The brackets change each year. The IRS adjusts them for inflation, so the income ranges shift slightly year to year. You can find the current year's brackets on the IRS website or on your tax software.

State income tax on savings interest

Most states that have an income tax also tax savings interest. The state rate is usually lower than the federal rate — typically between 3% and 10% — but it stacks on top of federal tax. If you owe 22% federal and 5% state, you owe 27% total on your interest.

A handful of states do not tax interest income at all. These include Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming. If you live in one of these states, you owe only federal tax on your savings interest.

Some states tax interest but exempt certain types of accounts. For example, a few states do not tax interest earned in a state-sponsored 529 college savings plan. Check your state's tax department website or ask a tax preparer about the rules where you live.

Tax-advantaged accounts that reduce or eliminate tax on interest

A regular savings account offers no tax break. But certain retirement and education accounts let you earn interest without paying tax on it — at least not right away.

In a traditional IRA or 401(k), interest and investment gains are not taxed while the money sits in the account. You pay tax only when you withdraw the money in retirement. This means your interest compounds without being eaten away by annual taxes. If you earn $500 in interest in a traditional IRA, you owe no tax that year; you owe tax only when you take that money out.

In a Roth IRA, interest is never taxed — not while it sits in the account, and not when you withdraw it in retirement. This is the biggest tax advantage available for savings. The catch is that you can only contribute a limited amount each year ($7,000 in 2024 for most people), and you cannot withdraw the earnings until you are 59½ without a penalty.

A 529 college savings plan works similarly to a Roth IRA for education: interest grows tax-free, and you pay no tax when you withdraw the money to pay for college. If you use the money for something other than education, you owe tax on the earnings plus a 10% penalty.

What happens if you do not report savings interest

If you do not report interest income on your tax return, the IRS will likely catch it. Your bank files a 1099-INT with the IRS, and the IRS matches it against your return. If the interest is missing, you will receive a notice asking you to file an amended return and pay the tax you owe, plus interest on the unpaid amount and possibly a penalty.

The penalty for not reporting income is usually 20% of the unpaid tax, though it can be higher if the IRS determines the omission was intentional. The interest on unpaid tax compounds daily, so the longer you wait to correct it, the more you owe.

If you made an honest mistake, you can file an amended return (Form 1040-X) and pay what you owe. The IRS is usually more lenient with taxpayers who correct errors themselves than with those who wait to be caught.

Frequently Asked Questions

Do I owe tax on savings interest if I do not make much money?

You owe tax on all savings interest, regardless of your income level. However, if your total income is below the standard deduction for your filing status, you may not have to file a tax return at all. In 2024, the standard deduction is $14,600 for a single person and $29,200 for a married couple filing jointly. If your income is below that threshold, you do not have to file.

Can I deduct savings account fees from my interest income?

No. You report the full interest amount on your tax return; you cannot subtract fees. However, investment-related fees and expenses may be deductible in some cases, but this applies mainly to people with substantial investment income and is complex. For a regular savings account, you report the interest as-is.

What if I earned interest in multiple savings accounts?

You add up all the interest from all your accounts and report the total on your tax return. Each bank sends a 1099-INT for its own account, but you combine them when you file. The IRS receives all the 1099-INTs, so make sure your total matches.

Does a high-yield savings account get taxed differently?

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

What if I moved money between accounts during the year?

Only the interest you earned is taxable, not the transfers themselves. If you moved $5,000 from one account to another, that $5,000 is not income. But any interest that money earned before or after the move is taxable. Your 1099-INT will show only the interest, not the transfers.