What gets taxed in your savings account

The money you deposit into a savings account is never taxed — that's your own money. What gets taxed is the interest your bank pays you on that balance. If your account earns $50 in interest over a year, that $50 is taxable income. The original deposit stays yours, tax-free.

Your bank does not automatically deduct taxes from interest payments. Instead, the interest is added to your account in full, and you report it on your tax return. The IRS then taxes it at your ordinary income tax rate — the same rate that applies to wages, freelance income, or other earnings.

How much tax you actually owe depends on your total income for the year and your tax bracket. Someone earning $30,000 a year will owe less tax on $50 of interest than someone earning $150,000. There is no single percentage that applies to everyone.

Key Takeaways

  • Banks do not withhold taxes from savings interest — you receive the full amount and report it yourself on your tax return.
  • Interest income is taxed at your ordinary income tax rate, which depends on your total earnings and filing status, not on a fixed percentage.
  • Your bank will send you a Form 1099-INT if you earned $10 or more in interest during the year, and you must report this on your return.
  • Interest earned in a traditional IRA or 401(k) is not taxed until you withdraw it, but interest in a regular savings account is taxed in the year it is earned.
  • High-yield savings accounts earn more interest than regular savings accounts, which means more taxable income — but the tax treatment is identical.

When your bank reports interest to the IRS

If your savings account earned $10 or more in interest during a calendar year, your bank is required to send you a Form 1099-INT by January 31 of the following year. This form lists the total interest paid to you. You receive a copy, and the bank sends a copy to the IRS.

You must report this interest on your tax return, even if you did not receive a 1099-INT. If you earned less than $10, the bank may not send the form, but the interest is still taxable. Some people with multiple accounts or banks may receive several 1099-INT forms — you add up all the interest from all forms and report the total.

The 1099-INT shows only the interest earned. It does not calculate your tax or tell you how much you owe. That calculation happens when you file your return and your tax software or preparer adds the interest to your other income.

How tax brackets affect what you owe

Your tax rate on savings interest depends on your tax bracket, which is determined by your total income and filing status. If you are single and earn $11,000 in wages plus $500 in interest, your taxable income is $11,500. That $500 is taxed at whatever rate applies to that portion of your income — not at a flat rate.

In 2024, for example, a single filer in the 12% tax bracket pays 12% on each additional dollar of income, including interest. Someone in the 22% bracket pays 22%. The brackets change each year and vary by filing status (single, married filing jointly, head of household, and so on).

This means a $100 interest payment costs one person $12 in federal tax and another person $22, depending solely on their other income. There is no way to know your exact tax bill without knowing your full income picture for the year.

Tax-advantaged accounts that delay or avoid tax on interest

A regular savings account taxes interest in the year it is earned. But certain accounts let you defer or avoid that tax:

  • Traditional IRA or 401(k): Interest earned inside these accounts is not taxed until you withdraw the money in retirement. You may owe tax then, depending on the account type and your retirement income.
  • Roth IRA: Interest earned inside a Roth IRA is never taxed, as long as you follow the withdrawal rules. Withdrawals in retirement are tax-free.
  • 529 college savings plan: Interest earned in a 529 is not taxed as long as the money is used for may have access to education expenses. Non-may have access to withdrawals are taxed on the earnings portion.
  • Health Savings Account (HSA): Interest is not taxed if the money is used for may have access to medical expenses. Otherwise, earnings are taxed and subject to a penalty.

These accounts have contribution limits and other rules, so they are not available to everyone or for every amount of savings. But if you have access to them, they can significantly reduce the tax on interest income.

State and local taxes on savings interest

Federal income tax is not the only tax on savings interest. Many states also tax interest income at their own rates. Some states have no income tax at all, while others tax interest at rates ranging from roughly 2% to 10%, depending on your state and income level.

A few states offer tax breaks on interest from savings accounts or CDs held by residents over a certain age, but these are uncommon. Most states straightforward tax interest as ordinary income, the same way the federal government does.

If you live in a state with income tax, your total tax on interest is federal plus state. Someone in a 22% federal bracket living in a state with a 5% income tax effectively pays 27% on each dollar of interest. This is another reason why the exact tax you owe varies widely by individual circumstances.

Reporting interest on your tax return

When you file your federal tax return, you report interest income on Schedule B (if you have more than $1,500 in interest or dividends) or directly on Form 1040 (if you have less). You list each source of interest or provide a total, depending on how many accounts you have.

If you received a 1099-INT, the amount on that form should match what you report. If it does not — for example, because the bank made an error — you should still report the correct amount and keep records showing why they differ. The IRS will notice if your return does not match the 1099-INT the bank sent them.

State tax returns also require you to report interest income, usually on a similar schedule. The state uses the same 1099-INT or your own records to verify the amount.

What happens if you do not report interest income

The IRS receives a copy of every 1099-INT your bank sends. If you do not report the interest on your return, the IRS will likely catch the discrepancy during processing. This can trigger a notice asking you to pay the tax owed plus interest and penalties.

Penalties for underreporting income start at 20% of the underpaid tax and can go higher if the IRS determines the error was intentional. Interest accrues on the unpaid tax from the original due date. Even small amounts of unreported interest can result in significant penalties over time.

Reporting the interest takes minutes and costs nothing. Not reporting it creates a debt that grows and becomes harder to resolve. If you missed reporting interest in prior years, you can file amended returns to correct the error — this is far better than waiting for the IRS to contact you.

Frequently Asked Questions

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

Yes. Your bank only has to send you a 1099-INT if you earned $10 or more, but interest is taxable regardless of the amount. You must report all interest income on your tax return, even if it is $5 or $2.

Can I deduct the taxes I pay on savings interest?

No. Interest income is added to your taxable income, and you pay tax on it. You cannot deduct the tax itself. However, if you have investment losses or certain other deductions, those may reduce your overall taxable income and lower the tax on your interest.

Is interest from a money market account taxed differently than a savings account?

No. Money market accounts, savings accounts, and CDs are all taxed the same way — the interest is reported on a 1099-INT and taxed as ordinary income in the year it is earned. The account type does not change the tax treatment.

What if I moved money between banks during the year?

Each bank reports only the interest earned on money held at that bank. If you had $5,000 at Bank A for six months and $5,000 at Bank B for six months, Bank A reports interest on the first $5,000 and Bank B reports interest on the second. You add both 1099-INTs together and report the total interest.

Do I owe taxes on interest if I did not withdraw the money?

Yes. You owe tax on interest in the year it is earned and added to your account, even if you never withdraw it. The interest is income the moment the bank credits it to your balance.